Capacity pressures easing as higher interest rates dampen demand - Quarterly Predictions, December 2023

New Zealand Institute of Economic Research (Inc)
Media Release, 28 November 2023

For immediate release

The easing in inflation pressures in the New Zealand economy is becoming more apparent, reflecting a combination of softening demand and increased supply. Although the Reserve Bank of New Zealand started increasing interest rates in October 2021, the dampening effects on demand have become more apparent in recent months. Many households are rolling off historically low fixed-term mortgage rates onto significantly higher rates. As households pare back on discretionary spending in the face of higher mortgage repayments, the effects of weaker demand are broadening across the New Zealand economy. 

Recent indicators point to this shift in the economy from constrained supply to weaker demand being a key concern for businesses. The NZIER Quarterly Survey of Business Opinion had shown, over the COVID-19 pandemic, a sharp rise in the proportion of firms reporting finding labour as the primary constraint on their businesses, reflecting the severe labour shortages over this period. This proportion of firms has fallen substantially over the past year, as the proportion of firms reporting weaker demand as the primary constraint on their business picked up.

Record high net migration drives turnaround in labour shortages 

The surge in net migration inflows has been a key driver behind the remarkable turnaround in labour shortages. Although there was an increase in the number of New Zealand citizens leaving the country since international borders reopened, this has been more than offset by the number of people moving to New Zealand from other countries. Annual net migration inflows are estimated to total over 118,000 for the year to September 2023. 

So far, the impact of these net migration inflows has been more apparent on the supply side of the economy. However, we expect strong migration-led population growth to support demand across a range of sectors from 2025. In particular, we expect stronger housing demand to underpin a recovery in construction activity. 

We forecast annual average growth in GDP to ease to just over 1 percent over the coming year before picking up towards 3 percent over 2026. 

No further OCR increase in this cycle

The easing in inflation pressures in the New Zealand economy affirms our expectation the RBNZ will keep the OCR on hold at 5.5 percent for the coming year. We expect a return of annual CPI inflation to be within its 1 to 3 percent inflation target band in the second half of next year, allowing the central bank to move the OCR to less restrictive settings from 2025. 

Quarterly Predictions is an independent review of New Zealand’s economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER’s members. 

For further information, please contact: 
Christina Leung, Principal Economist & Head of Membership Services 
christina.leung@nzier.org.nz, 021 992 985