The risk of an economic recession is getting closer by the day, according to the BNZ.
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Head of research Stephen Toplis says the imbalances within the economy and the external pressures on it have become more pronounced and the measures needed to fix the problems are becoming more aggressive.
"The chance of a soft landing is fading."
The main pressures have come from the series of supply-side shocks to the economy such as the lack of staff and Omicron leaving businesses forced to hire temporary staff, he said. While Russia's invasion of Ukraine, China's Covid lockdowns, and a surge in prices for imported fuel, metals, food and a host of other items has added to the external pressures, with a weaker New Zealand dollar raising import prices.
The initial economic shocks from Covid-19 had been cushioned by government support measures, low interest rates, and resilient households but that has only added the fuel of demand to the fire of supply shortages, he said.
"The only available option is to crush demand to meet the new levels of supply."
Toplis said that inevitably meant the Reserve Bank (RBNZ) was left with no other option but to raise interest rates and dampen demand to combat 30-year high inflation, which it has started to do, while it would also hope for a rise in unemployment.
"Our central forecast, currently, is that New Zealand's growth stalls completely in 2023. The danger is that the wheels well and truly fall off. "
Toplis said more pressures were gathering with the gloss coming off agricultural production, falling house prices which would make households less keen to spend, and high fuel prices, along with a generally softening global economy as well.
"So, whichever way you look at it, the planets are aligning in such a way that a recession seems difficult to avoid."
He was expecting any recession would be next year, with the near term outlook likely to be solid growth in the middle of this year after a flat start because of the rebound from the Covid restrictions.
However, Toplis said there were factors that would moderate any downturn including a gradual recovery in tourism, more overseas workers, houses becoming more affordable, and healthy government finances, which would cushion any major downturn.
"There is, of course, the chance a recession does not eventuate but we think, given the way the world is evolving, households and businesses would do best adopting a prepare for the worst, hope for the best strategy."