Kiwi households are set to remain squeezed with interest rates continuing to rise and inflation staying above projections, according to Westpac.
The bank on Tuesday morning revealed its latest economic overview, stating inflation would likely remain above the Reserve Bank's target for all of next year.
Westpac chief economist Kelly Eckhold expected the new Government would tighten the fiscal purse strings to try and stabilise the Budget, claiming it would have to make some tough choices.
Meanwhile, Eckhold said while higher interest rates would restrain house prices for now, the surge in population would have a significant impact - with prices expected to rise 8 percent next year.
"The housing market has bottomed [out] and is now starting to turn higher again," he said in a statement. "The policies of the new centre-right Government will support the housing market by improving after-tax returns for investors who have been less keen on housing investment in the last couple of years."
'Treat' on the way?
Reacting to the report, independent economist Cameron Bagrie pointed out some positives.
There was "a bit of a treat" on the way, he said - inflation is going away in 2025, according to Westpac's projections.
"We're going to get there," Bagrie told AM.
"If you strip out migration... the economy's going to be going backwards for another couple of years so there are not too many treats in that package, but this is the flipside to inflation - paying the piper on the other side."
New Zealand's economic recovery would also depend on how the country's biggest trading partners fared, particularly China, he said.
"The global economy, broadly speaking, is holding together but there are a lot more downside risks than up - there are a lot of concerns about China at the moment and, of course, China's an important trading partner both directly for New Zealand but indirectly for our other most important trading partner Australia. So New Zealand's fortunes are destined - or intertwined - with China and that broader Asian region."
Going forward, Bagrie expected some hard work domestically to get the economy back on the right path.
"The treat, in regard to lower inflation, is going to revolve [around] an economy that's going to underperform for another couple of years," he told AM host Melissa Chan-Green.
"We've been through this subdued period of growth but it's still [in the] early stages in regard to getting rid of inflation.
"Headline inflation is still up around 5.6 percent, yet core inflation measures are still around 5 - and inflation is ruthless. It sucks money out of people's pockets.
"There's a lot of pain there across the general economy at the moment and general society - we're still [in the] early stages because the unemployment rate is still very low. We're going to see some figures later this week that are going to see the unemployment rate moving up marginally and we don't like to see that socially or economically but, unfortunately, that's one of the prices you pay for getting inflation down."
Westpac predicted unemployment would rise to 4.3 percent in December and 4.5 percent in March. Annual inflation, meanwhile, was expected to drop from 5.6 percent to 5.1 percent by the year's end.
