‘Hard landing’ likely for NZ’s economy as another OCR hike predicted

In 2014 a renowned economist said New Zealand had a rockstar economy, but now he’s warning Aotearoa is heading for a ‘hard landing’ as the Reserve Bank desperately tries to rein in our sky-high inflation.

The Reserve Bank of New Zealand (RBNZ) will announce the Official Cash Rate (OCR) on Wednesday and experts predict there will be another jump. It comes as New Zealand’s annual inflation increased a whopping 7.3 percent in the June 2022 quarter compared with the June 2021 quarter.

The RBNZ is trying to engineer a soft landing by reducing spending just enough to get inflation under control without throwing the country into recession.

But according to HSBC economist Paul Bloxham, Aotearoa could be in store for a much harder landing than experts would like. He said New Zealand’s once rockstar economy is now in rehab.

“I think the rockstar has had a tough time. I don’t think you’ve got your mojo back yet,” Bloxham told AM’s Ryan Bridge on Tuesday.

“I think we are still in a situation where there are lots of challenges…Perhaps the rockstar is in rehab. That’s certainly a reasonable way of thinking about it.

Bloxham said the COVID-19 pandemic had huge economic consequences and high inflation has embedded in New Zealand, making the RBNZ’s job even harder.

The RBNZ is facing a tough situation because the options available to it to get the economy back on track “aren’t particularly palatable”, he said.

“The main thing is they’ve got to slow the economy down, they’ve got to slow it down because inflation is high and we just haven’t had a situation with inflation this high for decades, I mean it’s a global phenomenon.”

Bloxham said the RBNZ is facing the tough challenge of increasing the OCR to force people to spend less – something that’s unlikely to be popular.

He said this is made harder by the fact wages are rising to match inflation, which means another significant OCR hike is likely.

Bloxham also warned while the RBNZ is aiming for a soft landing – that is looking less and less likely.

“I think New Zealand’s challenge is quite large. I think the RBNZ will lift rates by 50 basis points again this week. I do think that it’s going to be very hard to avoid a hard landing here. You’re going to have to have a bigger downturn to get inflation out of the system.”

When asked what a “hard landing” looked like, Bloxham said it means Gross Domestic Product (GDP) is likely to fall around the turn of the year.

New Zealand’s GDP dropped 0.2 percent in the first quarter of 2022. The next data will be released in September and if GDP falls again the country will be officially plunged into a recession.

Bloxham said avoiding a hard landing will be more difficult because the RBNZ has to cool the economy which could also be hit by the global economy slowing down as well – which could spell trouble for a trading nation like New Zealand.

“There’s a hefty downturn going on,” he warned.

The Reserve Bank will reveal the OCR on Wednesday and experts are predicting the country will see another lift of at least 50 basis points.

In October 2021 the RBNZ started raising the OCR from its record lows of 0.25 percent. By May 2022 it had hit 2 percent with the RBNZ hiking it again in July to 2.5 percent.

Experts now predict it will increase to 3 percent this month. The OCR dictates the cost of borrowing money. Increasing it increases mortgage rates, putting pressure on Kiwis’ bottom lines and in theory reducing spending.