Image: Tina Tiller
Image: Tina Tiller

PartnersDecember 18, 2023

An economic review of 2023

Image: Tina Tiller
Image: Tina Tiller

Record high migration in 2023 has had an impact on rent, inflation, interest rates and house prices. What will this all mean for 2024? Kiwibank’s economists break it down.

The year 2023 has been tough. From bank failures in the Wild West, to conflict in the Middle East and cyclones in the South Pacific. Headlines from every corner of the globe have kept us on the edge of our seats. But as we wave ka kite to 2023, we look to what 2024 might bring. It’s that time of the year when we sharpen our pencils, pull out the darts, dust off the crystal ball, and pray to the economic gods. They never answer. But it’s a healthy exercise to step back and refine our view into next year. And we continue to see the current economic climate as particularly awkward for many businesses and households (read Kiwibank’s full 2024 Outlook note here).

The RBNZ is engineering a sharp slowdown. They want inflation back to 2%. But at 5.6%, there is still a long way to go. The full force of the last two years of monetary policy tightening is still working its way through the economy. Monetary policy works with long lags. But most of the impact has hit households and businesses. Household budgets are being stretched. And businesses now worry more about demand for their product or service, as well as costs. On top of the rapid rise in interest rates, high rates of inflation have slashed household purchasing power, and falling house prices have dented confidence and the “wealth effect”. But it’s not all bad news…

The biggest development this year happened at the border. Evidently, Aotearoa is the place to be. Tourists are returning by plane and by ship, and migrants are arriving in droves. In fact, 2023 can be crowned the year of migration. In the last 12 months (to October), we have imported a net 128k permanent and long-term migrants – that is the largest net inflow by a long shot. But the impact of surging migration is two-sided. On the helpful side, the influx of youthful migrant workers is expanding the labour force and dampening wage pressure. The disinflationary force is especially strong given the tightness in the labour market to begin with. Employers have been starved of workers. But our surging migration is helping to satisfy appetites, quickly. The labour market is softening, at a time when the demand for workers is starting to ease. Businesses are more cautious than they were a year ago. 

But on the other side of the migration coin, more people means more demand – including housing. It’s been a wild ride for Kiwi property (read Kiwibank’s housing note here for some killer one-liners for the great summer BBQ debate). House prices are more likely to rise than fall next year, for the right and wrong reasons. The surge in migration will play a big role. The demand/supply imbalance will worsen. The surge in migration and the loss of dwellings at high risk of climate change will only exacerbate the housing shortage. The new government will play a big role. Because the “promised” reintroduction of interest deductibility, shortening the Brightline test timeline, and possible watering down of the CCCFA, will entice investors. Any added infrastructure spend or incentives for new builds will also be welcomed. Interest rates will also play a large role, eventually. We think rates will fall in 2024. But buyer beware: The RBNZ is threatening to hike again. So there may be a lift near-term. Our best guess is house prices will rise by 5-to-7% next year. Call it 6% to sound precise.

The migration-induced boost to our team of five million – actually, make that 5.3 million – has also led us to upgrade our projections for Kiwi economic output. We still see the economy pulling into the slow lane in 2024. Our models warn of a double-dip recession. We recorded the first dip over summer last year, and we are likely to record the second over summer this year. The downturn we now expect is one of shorter duration and shallower magnitude than we thought six months ago. But make no mistake, the economy is weakening under the weight of the RBNZ’s heavy hand. If we consider periods of (effectively) no growth in 2024, then we expect about 12-straight months of soft activity. And for the average Kiwi on the street, the shallow recession will feel worse than the migrant-inflated figures suggest. Because with more people at the party, their slice of the economic pavlova is shrinking. 

When it comes to forecasting, it is as much an art as it is a science. But the way our models read the tea leaves, 2024 will be the year of the slowdown. Households will continue to feel the pinch. And businesses will continue to put out fires as order books shrink, costs inhibit and profitability shrivels. Downbeat employment and investment intentions of many businesses speak volumes. But the slowdown is a necessary one. At the of the day, it’s all about inflation and getting back to 2%. We’re making encouraging progress. We’ve seen inflation fall from the 7.3% peak to 5.6%. And we expect it to have a 4%-handle by year end 2023. For inflation to fall from the 7s into the 6s, 5s and now the 4s – that’s quite the psychological shift. And as we inch closer to the RBNZ’s target, we inch closer to flipping the last page of the chapter on rate hikes. The easing cycle (rate cuts) should begin soon. This time, we hope the economic gods are listening.

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