Source: Radio New Zealand
ASB has re-written its economic forecasts. (File photo) 123RF
- ASB rewrites forecasts because of Middle East conflict
- Slashes 2026 growth forecast to 1.3 pct from 2.9 pct
- Raises inflation forecast to 4.2 pct mid year, before gradually easing
- Duration of conflict will dictate severity of economic shock
- RBNZ faces growth-prices dilemma
- RBNZ expected to focus beyond short term shock, hold rates until year end
The economic recovery has likely been delayed until next year because of the Middle East conflict, according to a new report from ASB.
The bank joined other local forecasters in downgrading the economic outlook, with significant cuts to growth, higher inflation, lower investment, household consumption, and higher unemployment.
ASB chief economist Nick Tuffley said before the conflict and consequent surge in oil prices the economy was ready for a modest recovery through the year supported by lower interest rates and easing inflation pressures.
“With the new headwinds of higher fuel prices and potential fuel scarcity, that recovery is now unlikely to take place until 2027.”
Tuffley said the economy was set to contract in the three months ended June, with annual growth falling to 1.3 percent from its previous forecast of 2.9 percent as higher fuel prices hit consumer spending, disrupt tourism and lower business investment.
At the same time inflation was forecast to rise to 4.2 percent in the June quarter before gradually easing to the high 3 percent level early next year.
He said the severity of the impact depended on how long the conflict lasted and that was like asking “how long is a piece of string”.
“If the conflict eases sooner than expected, the outlook would improve quickly. But for now, households and businesses need to be prepared for a tougher, more uncertain period.”
At this stage ASB was forecasting elevated energy prices through to September.
RBNZ dilemma
Tuffley said the conflict has also given the Reserve Bank (RBNZ) a challenge between higher inflation and inflation expectations, and the hit to growth.
He said the RBNZ governor Anna Breman had recently signalled the central bank would be inclined to “look through” the immediate short term inflation impact
ASB was sticking to its pre-conflict forecast that the official cash rate would likely be raised by the end of the year.
Tuffley said the RBNZ had been looking to the slack in the soft economy to counter inflation pressures, but this had not yet occurred with inflation at 3.1 percent at the end of last year, which was not a good starting point to cope with the oil price shock.
“In time, the OCR is still likely to go up, but we don’t see the RBNZ rushing,” Tuffley said, but adding the risks were skewed to the downside.
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– Published by EveningReport.nz and AsiaPacificReport.nz, see: MIL OSI in partnership with Radio New Zealand
