Economic relief could be pending with inflation expectations easing and interest rates likely to fall later this year, Rabobank senior market strategist Ben Picton says.
Speaking at a recent event for Rabobank’s food and agribusiness clients in Waikato, Picton said the bank believes the Official Cash Rate (OCR) has peaked at 5.5% and the Reserve Bank of New Zealand (RBNZ) will cut rates twice in the second half of this year.
Key factors for the bank’s forecast include the recent slump in economic activity, growing unemployment pressure, weak demand for goods and services and higher costs from disrupted trade caused by the Red Sea conflict with the Iranian Houthis.
Picton said the economy has emerged from the constraints of the effects of the covid-19 pandemic.
“We saw the supply side was under a lot of pressure and we saw demand was being juiced up by very low interest rates and lots of government spending, much the same as everywhere else around the world.
“And now the economy is kind of in transition. It’s rebalancing,” he said.
New Zealand recorded a technical recession early in 2023 and it contracted again in the third quarter of 2023.
“So we expect that when we get the data for the last three months of 2023, that it could show another contraction, which would be another technical recession.”
At the end of last year inflation was 4.7%, still well above the RBNZ’s 1-3% target range.
Demand for goods and services has been shrinking since 2022 and should that start growing again, it would be a sign of demand exceeding supply, which could potentially delay cuts and cause another OCR increase.
The labour market is showing more resilience than commentators and economists predicted with unemployment rising at a slower rate than was expected.
“And what that indicates is that the labour market is a lot more resilient than what economists had been predicting.
“And when you have a tighter labour market you have higher wages growth and higher aggregate demand and, right now, the RBNZ wants that aggregate demand to drop lower.”
Picton said there is softness beneath the headline figure and he thinks unemployment will rise fast enough to concern the RBNZ.
He said that, beyond 2024, Rabobank expects the OCR to settle about 3.5%.
