According to the government, New Zealand is facing a recession in 2023 during the global economic slowdown and as the central bank hikes rates to curtail inflation.

Within its Half-Year Economic and Fiscal Update released on Wednesday, the Treasury Department said GDP would contract for three quarters starting in Q2. New Zealand’s economy will shrink 0.8% in calendar 2023, the department added.

“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,” said Finance Minister Grant Robertson. “We face this with a strong starting point. We prepared ourselves for this slowdown with careful fiscal management.”

In November, the Reserve Bank of New Zealand forecast four consecutive quarters of contraction starting in Q2, and it may hike the Official Cash Rate to 5.5% from the current 4.25% to curb inflation, Bloomberg reports.

In addition, the Treasury said household incomes would face pressure from increasing mortgage interest rates and rising unemployment.

The jobless rate is forecast to increase from 3.3% to 3.8% by the middle of next year and 5.5% the following year, the Treasury said. Declining house prices will also affect household net wealth, hampering spending.

The Finance Minister added that the aim of next year’s budget would be to contain spending and unveil a fiscal policy that will bolster the central bank’s attempts to rein in inflation.

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

Furthermore, the 2022-23 budget deficit is forecast to stand at NZ$3.6 billion, less than the $6.6 billion forecast in the May budget, the Bloomberg report adds. It is predicted to return to surplus in 2024-25, albeit less than the previously forecast $1.7 billion.