Households’ finances are being squeezed on several fronts with more pain to come, a leading bank says.
Westpac’s latest economic bulletin, titled From Squeeze to Crush, said high levels of inflation had eroded spending power.
At the same time, borrowing costs had risen and were continuing to rise and the value of household assets had fallen during the past year.
“For many families, the pressure on their finances is going to become much more intense over the year ahead,” Westpac senior economist Satish Ranchhod said.
“Close to half of all fixed-term mortgages will come up for repricing over the next 12 months, and those borrowers will face refixing at substantially higher interest rates.”
He said the increased interest costs would take a large bite out of disposable incomes.
“The Reserve Bank has been hiking interest rates at a rapid pace to cool demand and dampen the red-hot inflation pressures that are gripping the economy,” he said.
“However, as the full brunt of those interest rate increases ripples through the economy, we expect the nation will slip into a recession in late 2023/early 2024.”
Ranchhod said the rate of unemployment would rise to about 4.8 percent in the coming years, from the current rate of 3.3 percent.
The tighter financial conditions would be be felt right across the economy, but he said there would be some big differences across household groups.
“Notably, those who purchased their first home in the past couple of years could see their finances being squeezed especially hard,” he said.
“Even for those people who still have jobs, they’ll still be facing a much bigger strain in terms of their spending. That could be a real drag on economic growth.”
Ranchhod said economic conditions would not improve as long as inflation continued at high levels.
Business confidence at low ebb
The latest quarterly survey of business confidence shows some of the worst rates on record.
The New Zealand Institute of Economic Research data, released yesterday, showed business confidence could be even lower than at the time of the 2008 recession.
Kiwibank chief economist Jarrod Kerr told Morning Report inflation was hitting businesses’ profitability and they were worried about the prospect of a recession.
“What worries me is that in this environment businesses have decided they want to pull back on their investment for the future and that kills growth quite quickly.”
Kerr said while the Reserve Bank was engineering a recession he was concerned it would go too far and would go deeper than necessary.
If the Official Cash Rate was raised as high as 5.5 percent (from its current 4.25) it would be “a step too far”, he said.
The impact of much higher interest rates was already flowing through to business costs.
“Inflation pressure is continuing to build and that again is playing on businesses but I do think the labour market will soften this year.”
Businesses were already signalling they would hire fewer staff.
If there was a global recession, the country’s economy would be in for a much harder landing, Kerr said.