Treasury forecasts NZ will avoid recession, sees unemployment rising, inflation back in RBNZ target range by late 2024 & house prices falling 21.3%

Treasury says New Zealand will avoid a recession as the Government reins in spending by 5% and allows net debt to climb to 22% of gross domestic product. 

Continued strength in tourism and an unexpected boom in migration will keep the country out of recession, according to updated forecasts provided in Budget 2023. 

The fresh forecasts are fairly rosy with a lower peak in unemployment and inflation falling back into the Reserve Bank’s 1% to 3% target, from 6.7% now, by December 2024. 

Unemployment will rise to 5.3% in late-2024, it's 3.4% now, before falling back to 4.8% in the end of the forecast period. 

Budget 2023’s operating expenditure is expected to be $7.6 billion in deficit, following on from a deficit of $7 billion in the 2022 financial year. 

The government books won’t return to surplus until Budget 2025 and net debt will peak at 22% of gross domestic product this year. 

Treasury is not forecasting any reduction in net debt across the next five years, with net debt expected to be at 18.4% in 2027 — a slight increase from 18% today. 

Finance Minister Grant Robertson said the Government would exceed the $4.5 billion operating allowance it set itself in December last year, and has budgeted for $4.8 billion of new spending. 

This was largely attributed to covering the extra cost of the cyclone rebuild. Future operating allowances have been increased from $3 billion to $3.5 billion, bringing total operating spending across the next four years to $15.3 billion. 

Treasury said fiscal policy in Budget 2023 would be expansionary, meaning it would add to total demand and inflation pressure in the economy. Longer-term fiscal policy would be contractionary, but less so than forecast in the half year update. 

Real government consumption is expected to decline by 5% between June 2022 and the start of 2025, with over half this decline having already occurred. 

“This decline in real government consumption reflects partly the conclusion of Covid-19-related spending, and partly the impact of wage and price inflation eroding the Government’s spending power”. 

“This fall in real government consumption helps unwind excess demand in the economy. It also follows a period of strong growth over the Covid-19 period when … real government consumption increased by 19%,” it said. 

Treasury also forecast further falls in house prices and a slower rebound to boot. 

“Higher interest rates and weaker wage growth are expected to lead to a further decline in house and other asset prices,” it said. 

The Treasury expects higher-for-longer interest rates to drive house prices down another 4.6% for a total peak-to-trough fall of 21.3%.