Interest Rate Hikes Could Tip US Into Recession; Will New Zealand Follow?

Tuesday, 28 June 2022, 6:19 am
Press Release: Kalkine

Highlights

• Recession fears have surmounted in the US as inflationary concerns rage in the backdrop.
• The New Zealand economy seems to be at risk of a slowdown as the US economic growth stalls.
• The low unemployment rate, low debt and increasing wages are providing some stability in current times of distress.

Recession fears in the US have scared Kiwi economists about a potential slowdown hitting the New Zealand (NZ) economy. Some experts have flagged concerns that New Zealand is “halfway to a recession” due to inflationary forces building in the backdrop.

The Russia-Ukraine war has derailed the economic recovery of many countries, including New Zealand. Increasing commodities and fuel prices have created an energy crisis that seems hard to mitigate. On top of that, the New Zealand economy shrunk by 0.2% in the March 2022 quarter.

This could potentially be the beginning of a downward trend for domestic economic growth, as visible across many other nations. Additionally, a US recession could dampen production in the NZ economy by hurting consumer and business sentiment. A decline in demand for goods and services could stall economic growth and remove little momentum that was gained in the restriction-free period.

ALSO READ: GDP fall to impact RBNZ’s monetary stance in next MPC?

Is New Zealand headed for a recession?

Many factors have pointed toward an imminent slowdown in the New Zealand economy. Firstly, interest rates have steeply increased in New Zealand as the Reserve Bank intends to return to normal conditions. With inflation showing no signs of a slowdown, further interest rate hikes can be expected from the Reserve Bank of New Zealand (RBNZ).

Higher interest rates reduce the spending capacity of households as monthly interest repayments increase. The RBNZ has been one of the first inflation-fighting central banks, with its inflation target set at 2%. However, the current inflation rate stands at 6.9%, which suggests that the central bank needs to do a lot more work now.

Amidst elevated inflation levels, the market expects the July monetary policy meeting to see an interest rate hike of 50 basis points. Upcoming interest rate hikes are expected to bring the official cash rate to 3% by August 2022. This could be an extremely challenging predicament for households managing higher living costs.

However, as inflation grows rapidly, questions arise about the central bank’s ability to utilise monetary policy tools to reduce inflation. Such questions emerging in the market could prompt the central bank to take a calculated risk while raising the interest rates. However, the real route taken by the RBNZ will only become visible with time.

What to expect over the coming months?

The economic contraction seen during the first three months of 2022 was particularly due to rising Omicron cases. However, Omicron-related uncertainty has receded, and the economy seems to have taken a better shape.

Going by Prime Minister Jacinda Ardern’s predictions, the economic growth could improve in the coming months despite all the worrying factors raging in the background. She expects the fundamentals of the economy to provide some stability.

These underlying fundamentals include a low unemployment rate, low debt, and border reopening. These factors could bring back some stability and provide much-needed support to the economy. The Government has also introduced a fuel tax cut to help ease the cost of living pressures for the citizens.

Additionally, the NZ government introduced increases to the minimum wage, superannuation, and other benefits in 2022. However, these measures can further feed into inflation and worsen the domestic economic outlook.

However, optimists are hopeful that higher wages could reach a point where they could outstrip the rising costs of living. Until then, most Kiwis could face a rocky road ahead and need to manage with the little momentum in the economy.

ALSO READ: Inflation worries: OECD asks NZ government to take targeted action

© Scoop Media