The Treasury said the economy returned to growth in the second quarter and will continue to expand, but that inflation will still retreat below 3% by the end of 2024. In contrast, the RBNZ predicted gross domestic product would shrink in the third and fourth quarters of this year. — Bloomberg
WELLINGTON: The Reserve Bank of New Zealand (RBNZ) and the Treasury Department are at odds over whether the nation needs another recession to get inflation under control.
The Treasury said the economy returned to growth in the second quarter and will continue to expand, but that inflation will still retreat below 3% by the end of 2024.
In contrast, the RBNZ last month predicted gross domestic product (GDP) would shrink in the third and fourth quarters of this year.
Governor Adrian Orr added that that’s the “bare minimum” required to get inflation back into his 1% to 3% target band.
Several bank economists agreed the economy needs to slow sharply, and some are cautioning that growth at the pace the Treasury is projecting could force the RBNZ to resume tightening.
The central bank has raised the official cash rate (OCR) to 5.5% and said that should be enough, though its forecasts indicate some risk of another hike.
“In our view, Treasury’s GDP outlook would be unlikely to bring about sufficient slack in the New Zealand economy to return inflation to 2% in a timely fashion,” said Miles Workman, senior economist at ANZ Bank New Zealand in Wellington.
“The economy will need to soften well into recessionary territory one way or another to bring inflation down, whether that’s due to external shocks or because the RBNZ has to keep hiking into next year.”
The South Pacific nation has already been through a shallow recession when GDP fell in the final quarter of 2022 and the first three months of 2023.
Data next week is expected to show that growth resumed in the second quarter.
The RBNZ projects inflation will slow to 2.7% by the third quarter of 2024 from 6% currently, assuming the economy contracts again.
In the Pre-election Economic and Fiscal Update published on Tuesday, the Treasury projected steady growth of 0.4% per quarter for the next year. It expects inflation to slow to 2.9% by the fourth quarter of 2024.
The Treasury assesses that much of the economic expansion is being driven by immigration, which it now expects to peak at almost 100,000, or 33,000 more than previously assumed.
The agency is also seeing more cyclone-related business investment and a faster turnaround in house prices.
Treasury said the budget’s financial impulse will be more expansionary than previously expected in the year through June 2024.
“This is not helpful for the RBNZ trying to lower elevated inflation,” said Mark Smith, senior economist at ASB Bank in Auckland.
“While we expect 5.5% to be the OCR peak this cycle, expansionary financial settings could see the OCR move higher still.” — Bloomberg
