Economists look ahead to 2023 with fear and anxiety
Monday, 21 November 2022
After a year of ‘records’ both good and bad, next year will feel like a hangover year for the economy, if economists’ forecasts are on the money.
The big unknowns remain just how quickly inflation will come down, whether interest rates may already have put the country on a path to recession and of course the outcome, if there is one, of Russia’s war on Ukraine.
Most forecasters believe the economy will have grown by somewhere between 2% and 3% this year, after the strong 5.7% bounce-back from Covid lockdowns last year.
Although unremarkable in a more normal year, that would be a pretty strong growth rate historically once translated into “GDP per capita”, given the lack of immigration and slow population growth over the period.
But growth is expected to slow further next year, probably to a snail’s pace, as the impact of interest rate-rises and predicted recessions in Europe and possibly the United States kick in.
BNZ, for example, is forecasting 2.4% growth this year and for that to slow to just 1% next year as aggressive interest rate hikes and a decline in global growth hit home.
Infometrics forecasts that the price for getting inflation back under control in New Zealand and overseas will be two years of “stunted growth” that will mean a couple of uncomfortable years for households.
Chief forecaster Gareth Kiernan suggests people view it as “a necessary sacrifice of short-term growth for longer-term stability and sustainability in the economy”.
Official unemployment has hovered between 3.2% and 3.3% so far this year.
That is the lowest since Stats NZ began collating comparable statistics in 1986 and it’s almost certainly the lowest unemployment has been since at least the late 1970s.
No-one is expecting that to last, though the current forecasts for the jobs market aren’t dire.
The Reserve Bank was assuming in August that unemployment would climb back above 4% next year and ANZ has it at 4.5% by the end of 2023.
BNZ has been forecasting a more modest rise, with unemployment still sitting at only 3.7% at the end of next year.
Assuming there are no new supply-side shocks, say from another international crisis, then moribund growth, higher interest rates and gradually rising unemployment should finally deal to inflation.
Inflation has been sitting at rates not seen for more than 30 years and was barely budged at 7.2% at the end of September.
Recent falls in the price of oil and other commodities bode better for inflation and BNZ sees it falling away quite sharply to 3% by the end of next year.
But as many banks now expect the official cash rate to rise to 5.25% early next year – potentially sending one-year mortgage rates as high as 7.5% – an end to the “cost of living crisis” looks some way off for borrowers at least.
Interest rate rises meant 2022 was a year most investors will want to forget.
As of early November, the NZX was down about 14% on the year and the US S&P Index was down by almost 21%.
The retreat extended to bond markets, with investors in New Zealand bonds experiencing average losses of 5% and investors in global bonds about double that, based on the performance of exchange-trade funds quoted on the NZX between January and November.
It was a similar story for housing.
The average price of a house in New Zealand fell 10% to $956,592 between the start of the year and September, according to QV.
BNZ research head Stephen Toplis said this year showed the limitations of the usual advice people received to diversify their assets to reduce risk.
“Fund managers will tell you that you need to be fully diversified because equities go in the opposite direction to bonds, and property moves differently.
“But the fact of the matter is that in the last 20 years they've all moved in tandem because interest rates kept falling and this year you’ve seen a reversal of that where they all declined in value as interest rates headed higher.”
Almost by definition, views on where the price of liquid financial assets such as equities and bonds will go from here is split.
After all, if people overwhelmingly expected them to rise or fall, they would have done that already.
If 2022 was the year when leading indicators turned downwards, 2023 will be the year when all the warning signs come home to roost, Toplis says.
“As the economy hits its worst, people will be talking about interest rates falling, and eventually the market will respond to that.
“So it is conceivable at some point next year we will see a move higher,” he says.
But there is also the possibility shares will retreat further as company profits take a hammering.
“What we haven't necessarily seen yet is people taking into consideration the potential earnings hit on equities,” Toplis says.
“Earnings have surprised many by their strength, but I think we have got the earnings hit yet to come as the global economy slows.”
The widespread assumption that house prices have further to fall is justified, he says.
“We've all known for a very long time that house prices have run unsustainably high, but nobody wanted to be the person that actually put a bet on that.
“The other thing I think people forget is the massive supply of housing that's coming on stream at a time when our population growth is very weak.”
Infometrics principal economist Brad Olsen sees next year as one in which people will be battening down the hatches.
“I feel next year is ‘crunch year’; it is when inflation pressures bite at the same time as higher interest rates really start to hit households and global tensions and global economic pressures remain intense.
“We're looking down the barrel of a recession in some parts of the world and New Zealand will not be immune from that. We see the economy going back into its shell more in 2023.”