Soaring interest rates and falling real incomes will result in a more pronounced slowdown in economic activity in both countries than most anticipate. In fact, we now expect New Zealand to enter a recession next year as the RBNZ will hike rates all the way to 4.5% in response to pervasive inflationary pressures. By contrast, we think that Australia will narrowly avoid a recession as the RBA should get on top of inflation before long. With unemployment rates set to surge and supply shortages diminishing, we expect inflation to fall more sharply than central banks are anticipating, paving the way for renewed policy easing from the end of next year.
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