(Bloomberg) -- New Zealand faces a recession next year amid a global economic slowdown and as the central bank raises interest rates to curb inflation, the government said.

­Gross domestic product will contract for three quarters starting from the second, the Treasury Department said in its Half-Year Economic and Fiscal Update published Wednesday in Wellington. Overall, the economy will shrink 0.8% in calendar 2023, it said.

 

“The global economy is headed for a rough ride over the next year, and  New Zealand will not be immune from the impact of that,” Finance Minister Grant Robertson said. “We face this with a strong starting point. We prepared ourselves for this slowdown with careful fiscal management.”

The Reserve Bank last month projected four straight quarters of contraction beginning in the second quarter, and said it may raise the Official Cash Rate as high as 5.5% from 4.25% currently to regain control of  inflation. 

Prime Minister Jacinda Ardern faces a general election later next  year, and the prospect of soaring living costs and a stalling economy won’t help her bid for a third term. Her Labour Party trails in political polls and lost a seat in a by-election last weekend.

Robertson said the government stands ready to support households. It announced a package of living support measures Wednesday, including extending a reduced fuel excise tax until the end of February and phasing it out by the end of March.

It will continue half-price public transport until the end of March, and then keep that discount in place for certain groups including tertiary students and low-income families. 

Mortgage Rates

The Treasury said household incomes are set to come under pressure from rising mortgage interest rates and higher unemployment. The jobless rate is projected to rise from 3.3% to 3.8% by mid-2023 and 5.5% a year later, it said. Falling house prices will also impact household net wealth, denting spending, it said.

Robertson said the focus of the 2023 budget will be to contain spending and achieve a contractionary fiscal policy that will support the RBNZ’s efforts to curb inflation.

“Tough choices will be required on the pathway back to surplus,” he said. “The government will look to prioritize existing spending whenever possible.” 

Treasury projects that tax revenue will rise at a quicker pace than expenses in the near term reflecting a stronger-than-expected 2021-22 starting point, which offsets weaker economic growth. 

As a result the 2022-23 budget deficit is projected to be NZ$3.6 billion, narrower than the NZ$6.6 billion forecast in May’s budget. The budget is projected to return to surplus in 2024-25, as it was in May, although the surplus will be smaller than previously forecast at NZ$1.7 billion. 

Net debt will rise to a peak of NZ$88.2 billion or 21.4% of GDP by mid-2024 from 17.2% at June 30, 2022.

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