Sluggish economic growth is expected
Despite the lifting of most COVID-related restrictions in September 2022, the economy is set to decelerate further in 2023 amid high inflation and rising interest rates. Fuelled by food, energy, and housing prices, inflation reached a three-decade high in the second quarter of 2022. While the increase in prices will decelerate in 2023, second-round effects from higher prices the preceding year will drive inflation. It is expected to continue to affect consumer confidence, which hit an all-time low in mid-2022 and, in turn, household consumption (57% of GDP). In addition, the high level of household indebtedness (173% of disposable income in Q2 2022), declining housing prices, and slower population growth due to lower immigration since the pandemic, will also constrain private consumption growth.
In the face of accelerating inflation, the Reserve Bank of New Zealand (RBNZ) started to increase interest rates in late 2021. Following the invasion of Ukraine by Russia, the central bank became more aggressive, increasing the size of hikes first from 25 bps to 50 bps and then to 75 bps, with the policy rate standing at 4.25% at 10 January 2023. With inflation expected to remain high, RBNZ could be prompted to make additional hikes in 2023. Rising interest rates and the housing market downturn will impact investment, the growth of which is expected to slow. Gross fixed capital formation should be boosted by public investment in infrastructure projects, including in transport. Exports of services should recover as tourism (14% of GDP, 16% of jobs in 2019) rebounds gradually after the country allowed fully vaccinated international travellers to enter the country in August 2022. Exports of goods, however, could take a hit from the global economic slowdown, with China and the US accounting respectively for 32.5% and 10.5% of the total in 2021. In addition, recession risks in Europe loom on exports prospect the (EU and UK represented 8.6% of goods exports in 2021).
A durably sizeable current account deficit
After higher expenses resulting from the Delta and Omicron outbreaks during FY2022, the government is set to return to the path of fiscal consolidation in FY2023. The budget for the year ending in June 2023 reveals lower expenditures, despite durably high spending on health (15% of the total) and the introduction of a USD 1 billion cost of living package to support low and middle incomes amid rising inflation. In the longer term, the government aims to post fiscal surpluses from 2024 and 2025. While public debt should increase, its share relative to GDP will remain relatively low compared to most developed economy peers.
The current account deficit is expected to remain high in 2023. With export growth to decelerate, the trade deficit should continue to weigh on the current account, while persistently elevated energy prices will support the import bill. Meanwhile, the deficit in the trade of services is likely to narrow as easing border restrictions will support tourism receipts. The income account, structurally in deficit due to profit repatriation by foreign investors and debt servicing costs (external debt accounted for 88% of GDP in 2021) should remain sizeable. The current account deficit is traditionally financed by large financial and capital inflows, mostly in the form of portfolio investment.
Torn between economic stakes and democratic values regarding China
New Zealand is a stable parliamentary democracy with strong institutions. Rewarded for its management of the crisis in the parliamentary elections in 2020, the Labour Party obtained an absolute majority in Parliament. While its leader Jacida Ardern conserved the highest share with 40% of poll respondents in September 2022 mentioning her as their “preferred Prime Minister”, ahead of Christopher Luxon (the leader of the National Party and leader of the Opposition), she resigned in January 2023. Chris Hipkins was then was sworn in to succeed her. While his results in the first polls since he became PM were similar the lasts of Ardern, the tight advantage over the opposition suggest a loss of seats in the forthcoming elections. In 2022, local elections resulted in the Labour Party party losing in two major cities, Auckland and Wellington.
As far as foreign affairs are concerned, the country has chosen to maintain a friendly stance towards China. Despite rising tensions between the latter and the US, with which New Zealand has a security alliance, and Taiwan, the country has attempted to maintain a balanced stance vis-à-vis Beijing given its strong economic ties with the second-world economy. That being said, it was among the signatories of a statement presented at the UN Committee on Human Rights calling for China to respond to findings of human rights violations against the Uyghur in Xinjiang. Regarding the invasion of Ukraine by Russia, New Zealand condemned the Kremlin’s actions and introduced sanctions in April 2022. Additional measures focusing on the defence and security sectors were implemented in October.