New Zealand’s economy continues to face economic headwinds, predominantly soaring inflation and rising interest rates, as the effect of the pandemic remains apparent.

As well as these headwinds, the country is also grappling with ongoing labour shortages, especially in the services sector, yet activity is experiencing a slowdown within several industries.

According to Principal Economist, Christina Leung: “Cost pressures remain intense for households and businesses, and this is driving pessimism. Central banks around the world have responded to the surge in inflation by increasing interest rates at a rapid clip. While this is having the intended dampening effect on demand, there are concerns activity will slow to the point of pushing economies into recession.”

The household sector continues to feel the greatest impact of higher interest rates, with a sharp decline in house sales and easing property prices.

“Higher interest rates have reduced the ability of households to borrow, which is weighing on housing demand. Added to that is the substantial proportion of mortgages due for repricing over the coming year. For many of these households rolling off historically low fixed mortgage rates onto markedly higher rates, an adjustment in spending will be required in the face of higher mortgage repayments,” Leung added.

“The latest retail sales data show a slowing in retail spending, and we expect this to continue as households hunker down to weather these latest headwinds of rising living costs and increased mortgage repayments,” she stated.

However, there are a series of upbeat factors bolstering the country’s growth forecast.

“Despite these headwinds, there remain factors supporting the recovery ahead. These include continued growth in incomes, as continued tightness in the labour market support higher wage growth and high commodity prices support farmgate returns. Added to that are emerging signs that cost pressures are starting to ease, particularly with the recent decline in fuel prices. And despite signs of easing in residential construction in recent months, there is a solid pipeline of work for the year ahead. We expect these factors will cushion the landing for the New Zealand economy as the Reserve Bank continues to lift interest rates over the coming year,” Leung continued.