Nick Tuffley: ASB chief economist as recession tipped to be twice as deep as earlier forecasts by bank

New Zealand’s looming recession is tipped to be twice as deep as previously thought, with Kiwis being warned to prepare for a tough rest of the year.

The bleaker forecast, from economists at ASB, comes as food prices rise at their fastest annual rate in more than 30 years and many struggle to afford the basics.

ASB is predicting a 2 per cent contraction to gross domestic product (GDP) by early 2024, which is double the 1 per cent economic shrink that the bank forecast in its last quarterly update.

And the country’s expected recession is likely to set in earlier than expected, according to the latest ASB Economic Forecast released today, with GDP falling 0.6 per cent in the December 2022 quarter.

Wellington university student Aidan Donoghue said he has hardly bought any fruit or vegetables in the last year. Photo / Mark Mitchell

ASB’s chief economist Nick Tuffley said high-interest rates and inflation will continue to restrain consumer spending in the coming year, with homeowners feeling the strain and pain the most.

Tuffley claims that the Reserve Bank (RBNZ) is reaching the end of its Official Cash Rate (OCR) rises, despite inflation being anticipated to remain above 7 per cent for the first half of this year.

“Things have overheated, and the stimulus to get us through the pandemic has been arguably too successful at keeping the economy running along, so now we’re feeling the effects of that and the economy being stretched,” Tuffley said.

“We expect rising living costs to add around $150 a week to household spending this year, and income growth is not likely to keep pace with this, despite another year of strong wage growth. It’s going to be a tough year, and home borrowers will feel these impacts disproportionately.”

Treasury economists are also pointing the finger at the Government for at least part of the high inflation the country is experiencing.

In research just released, Treasury economists said they could divide New Zealand’s inflation roughly into thirds: One third came from excessive demand caused by government spending and low interest rates, another third came from supply shocks from overseas, and another third was unknown.

Last week, official figures showed inflation in the US had dropped to 5 per cent in March.

The International Monetary Fund is also warning of a grim outlook for the New Zealand economy. Its 2023 outlook forecasts Aotearoa will have one of the lowest GDP growth rates and one of the highest inflation rates in the Asia-Pacific region in the coming years.

Infometrics chief economist Brad Olsen earlier said this highlighted the vulnerabilities New Zealand faces.

“The IMF has highlighted that there are risks, given how much our house prices have gone up in recent times, how much interest rates rising puts our economy in a slightly more challenging position in the years ahead.”

Meanwhile, according to ASB’s report, recent extreme weather events, which caused shortages of some fresh food, household goods, and cars, may cause inflation to rise even higher in the near future.

Tuffley said the rebuild after events, such as Cyclone Gabrielle and the Auckland floods, would help boost the construction sector, however, that “could be some time away”.

”The rebuild will provide a lift in GDP over the coming years but we know infrastructure replacement can take a long time, as we saw with the Christchurch earthquakes, and particularly in cases where location and design need to be rethought to improve resilience,” Tuffley said.

”Overall, we’re going to have to endure a year of things cooling down and that putting a bit of pressure on finances, so people will be putting away their wallets for a period and reining in their spending.”

But he said the continuing tourism recovery is positive with two-thirds of pre-pandemic visitor numbers returning to New Zealand.

Food prices, meanwhile have had the biggest annual increase since 1989 - up 12.1 per cent in March compared to a year ago, according to Stats NZ.

Grocery prices also predictably jumped again in March and shot up by 14 per cent in a year.

Stats NZ said grocery food prices rose 2.3 per cent in March, or 2.1 per cent up on February after seasonal adjustment.

‘We don’t get fruit and veg’

Wellington university student Aidan Donoghue said he has hardly bought any fruit or vegetables in the last year. Instead, he and his partner take vitamins and supplements to get nutrients because it’s cheaper.

”There are times when you crave an actual banana rather than something that is banana-flavoured. Since I’ve moved here, we have done big shops and don’t get any fruit and veg. There was a time when I can re