The economy is headed for another shallow recession, according to Westpac Bank economists.
Westpac Bank says with tourism remaining out of action, further growth will be harder to come by in the coming year. Photo: 123rf.com
The bank's latest quarterly forecasts suggest that the lack of overseas visitors over the summer would cost the country up to 6 percent in gross domestic product (GDP), and result in the economy contracting by 0.7 percent in the six months to March.
Westpac Bank chief economist Dominick Stephens said the Covid-19 shock was not over.
"GDP remains below the path it was on before Covid hit, reflecting the loss of international travel and tourism resulting from the closure of the border since March.
"With the domestic economy having already recovered its lost ground, and tourism remaining out of action, further growth will be harder to come by in the coming year."
Stephens said by the end of 2021, he expected GDP to be up just 2 percent on a year earlier.
The economy grew more than 14 percent in the three months ended September, as post-lockdown activity rebounded. The latest employment figures also showed falling unexpectedly to 4.9 percent.
Recent real time indicators have showed more subdued retail sales, freight movements, and continued contraction in the services sector, which makes up two-thirds of the economy.
"I think one of the key drivers of the relatively slow growth that we are expecting is ongoing construction and household spending activity. So basically rapidly rising housing prices are incentivising people to build more and spend more," Stephens said.
The one economic hotspot remained the housing market, which Westpac Bank picked to rise by 17 percent over the next 12 months, but said rising dwelling consents and little to no net migration since Covid-19 emerged was a sign that house prices and rent inflation could ease later in the year.
"When we put together very slow population growth and very strong housing activity, we are actually building far more than enough now to keep up with household formation and that means those severe shortages, while they are still there because they built up over years, they are rapidly receding," Stephens said.
It forecast inflation would climb to as high as 2.5 percent in June, because businesses would continue to struggle with stretched supply chains, driving up costs.
However, the Reserve Bank is picked to hold the Official Cash Rate at 0.25 percent until 2024, because it expected inflation to fall to 0.8 percent in 2022, as supply chains normalised and partly because of a rise in the exchange rate, which it forecast to rise to 78 cents against the US dollar.