Workers wanted: Labor shortages could be with us for years says ASB. Photo / Warren Buckland
New Zealand will struggle to attract workers in a tight global labor market and that will increase the risk of the official cash rate rising higher than 4 per cent, ASB says in its latest
quarterly economic outlook.
New Zealand’s economy was still on course to avoid recession but faced a difficult 12 months as interest rate rises and inflation persisted, ASB chief economist Nick Tuffley said.
Labor shortages were here to stay for some time and businesses should look to “more durable solutions to labor challenges” than short-term fixes, he warned.
ASB expects two 50 basis point increases in October and November, taking the Official Cash Rate to a forecast peak of 4 per cent by year-end.
That peak of 4 per cent is in line with money markets and a consensus of economists.
But the risks now tilted to the OCR peak being higher, rather than lower, Tuffley warned.
“With inflation pressures appearing even more acute than they did a few months ago, the RBNZ has kept up a fast pace of OCR increases,” he said.
“We envisage the RBNZ will hold the OCR at 4 per cent until some time in the first half of 2024, before gradually reducing to a more neutral level.”
ASB is the last of the big four banks to put out its quarterly forecasts in this cycle.
Only BNZ has penciled a recession – two negative growth quarters – in to its outlook.
BNZ has forecast a “modest contraction” in growth for the second and third quarters next year” but is forecasting CPI inflation to fall to an annual rate of 3.7 per cent by mid-2023 (from its current peak at 7.3 per cent).
ASB also expects that headline inflation will have peaked at 7.3 per cent in the June quarter but sees a slower return to comfortable levels.
“Falls in oil and broader commodity prices suggest we are past the peak in New Zealand inflation this cycle,” Tuffley said.
“Falling tradeable inflation is expected to drive a cooling in annual headline inflation, that is forecast to ease below 6 per cent by the end of the year and fall below 3 per cent in mid-2024.”
But the inflation outlook was still inherently uncertain, he said.
“We see the risk of high inflation outcomes persisting, with our recent work highlighting the tight labor market as being a key influence.
“Domestically generated inflation, which hit a record-high 6.3 per cent in June, could push higher over 2022 but then slow as pressures on capacity ease and
construction cost and dwelling rental inflation cools.”
Labor market conditions were having a huge influence on economic activity, inflation pressures and interest rates, he said.
“Our research points to these influences persisting. Compared to before the pandemic, the supply of people of working age that are available for work is likely to grow at a much weaker pace.”
Labor markets were also tight in many OECD countries and New Zealand will struggle to attract and retain staff, Tuffley said.
“We foresee net migration outflows continuing into well into 2023. Moreover, demographic shifts will also slow growth in the pool of potential workers.”
Organizations would continue to find it challenging to retain and recruit staff over the next couple of years, he said.
“Wage growth is also likely to remain firm. It will be worth businesses assessing more durable solutions to labor challenges rather than looking at short-term fixes.”
In their quarterly outlooks, ANZ and Westpac economists warned of “downside risk” despite picking New Zealand would narrowly avoid recession.
ANZ chief economist Sharon Zollner warned there was still a risk of recession early next year if international tourism and education didn’t improve as quickly as hoped.
Westpac’s Michael Gordon also sounded a note of caution around the recovery given the constraints on growth created by the tight labor market.
But there were early signs that demand was softening, some of the international price shocks of recent years were now receding, and longer-term expectations of inflation remained under control, he said.
“This suggests that inflation is on track to return to the Reserve Bank’s target in the coming years, without the kind of shock treatment that was needed around the world in the 1970s and 1980s.”