Westpac Economic Overview, August 2022 – Pushing Through

The New Zealand economy faces some lean growth in the year ahead as households’ budgets are squeezed, according to Westpac’s latest Economic Overview.

“An overstimulated economy in the wake of the Covid shock has led to the most serious bout of inflation in decades,” says Westpac’s Acting Chief Economist Michael Gordon. “Demand needs to be reined back into line with the economy’s productive capacity.”

Westpac expects the Official Cash Rate to reach a peak of 4%, likely by the end of this year. “More critically, interest rates will need to remain high for some time, in order to provide the necessary braking effect on the economy,” says Mr Gordon.

The good news is that there are early signs that demand is softening, some of the international price shocks of recent years are now receding, and longer-term expectations of inflation remain under control. “This suggests that inflation is on track to return to the Reserve Bank’s target in the coming years, without the kind of shock treatment that was needed around the world in the 1970s and 1980s.”

“As tough as it may get, the economy will need to push through the pain barrier for a while, because the end results will be worth it,” says Mr Gordon.

Westpac also notes that some of the forces that have restrained the economy during the pandemic are now easing. “Spending patterns around the world have begun to swing back towards services and away from physical goods, taking the pressure off global supply chains. Tourists are starting to return to New Zealand, which means we’re getting more value out of our natural assets. And the resumption of migration will help to address skill shortages in some areas, if not economy-wide.”

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