New Zealand Economic Forecast

The economy shrank in sequential terms in Q4 2022, as household and investment spending fell amid higher interest rates, elevated inflation and global headwinds. Activity likely gained some steam in Q1, although the economy seemingly remained weak. Rebounding retail payment card spending and stronger tourist and worker inflows in the quarter likely supported the economy. However, business and consumer sentiment remained deeply entrenched in pessimistic terrain throughout the period. Moving to Q2, April’s data paints a similar picture of still-downbeat business and consumer sentiment but expanding payment card spending. Meanwhile, in mid-May, the government delivered the 2023 budget, which includes higher infrastructure spending and measures to alleviate the cost of living crisis. The government forecast a wider-than-expected budget deficit, raising concerns over its inflationary effects.

Inflation fell to 6.7% in Q1 from Q4 2022’s 7.2%. It remained entrenched above the Central Bank’s 1.0–3.0% target band. Inflation is poised to ease gradually this year owing to a high base of comparison and rising interest rates. That said, volatile energy prices and faster wage growth pose upside risks.