"Prepare now for a challenging 2023," ASB warns, predicting high inflation and interest rates will lead to a rise in unemployment and recession next year.
Key takeaways from the report are that an economic slowdown is incoming with the Official Cash Rate (OCR) expected to peak at 5.5%, consumer spending falling and international tourism hampered by workforce shortages.
Summed up by ASB chief economist Nick Tuffley: "Demand is outstripping supply...our collective desire to spend is running well ahead of what we can effectively supply at reasonable cost.
"Inflation is proving stubbornly high, and we don't expect it will fall below the Reserve Bank's 3% target ceiling until mid-2025.
"Non-tradable inflation, which is linked to domestic wage growth, is pushing up businesses' operating costs and may continue to accelerate until the middle of 2023."
International, tradeable inflation has likely peaked and could be further mitigated if the last couple months' strengthening of the New Zealand dollar keeps up.
House prices to continue to drop
ASB is also predicting median house prices could continue to decline by up to 25%. Prices have fallen by 10.2%, or $107,747 in real dollar terms since the start of this year, according to QV's latest House Price Index.
Although QV said this fall is comparable to 2008 amid the Global Financial Crisis which saw home values fall by an average of 9.6%, it still won't reset the market to pre-pandemic levels - house prices increased nearly 30% nationally in 2021.
Household durables are the most exposed sector, with the expectation people will delay discretionary purchases such as cars, appliances and furniture.
"The Christmas mood is likely to be downbeat," says Tuffley; spending patterns will change and businesses will have to adapt "as the population grows and more people miss out on work while job creation stalls in a weak economy".
ASB believes some businesses will want to retain staff, ensuring they have the capacity for an eventual recovery with key skills currently in short supply.
Tuffley advises people "get your loan structure right and take a hard look at your spending and saving levels".
"If your home loan is refixing in the next year or two, understand how your payments may change and budget for this scenario."
Business forecasting tough times
The latest BusinessNZ planning forecast shows things are looking good, to begin with.
BusinessNZ Chief Executive Kirk Hope said there are still several factors businesses are worried about, including predictions of a shallow recession by the Treasury and Reserve Bank.
Kirk said household spending is set to be slashed, with mortgage-holding Kiwis in for a tough time in particular.
"Combined with elevated levels of household debt, increased mortgage payments will potentially put significant pressure on people and their budgets, even more so when our record low unemployment level starts to rise again."
The business lobby said there continues to be low levels of business and consumer confidence.
Tourism offers hope
Alongside the hopeful return of international students in the new academic year, one bright spot in ASB's outlook is the return of major tourism. However, labour shortages in the hospitality and tourism industries are expected to constrain its potential.
"This is a sector that’s rising from the ashes and needs more people in the right places, particularly Queenstown," says Tuffley. Staff will have to be attracted from different regions, industries and countries for this industry "that desperately needs a successful summer".
This comes as Stats NZ reported a surprisingly healthy GDP increase 2% for the September quarter, 2.7% for the year ending in September and 1.9% for GDP per capita.
Finance Minister Grant Robertson said these numbers reflected the Government's "balanced approach" to spending.
"This is another solid result and shows the strength of the economy despite a challenging global situation marked by high inflation and the effects of the Ukraine war and ongoing disruptions from the pandemic," said Robertson.
However, ASB predicts the economy will shrink by 1% by the end of next year and unemployment will rise to 5.5%, up from the current 3.3%.
Furthermore, despite the recently optimistic economic figures, the current account deficit of 7.9% of GDP - the amount the country needs to borrow to balance the books - is "now the highest (just) since 1984’s foreign exchange crisis".
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