New Zealand led the world in raising interest rates to combat the post-pandemic inflation wave. Now it’s officially in recession in a possible harbinger of what lies ahead for others.
Gross domestic product fell 0.1 per cent from the fourth quarter, when it dropped a revised 0.7 per cent, Statistics New Zealand said Thursday in Wellington. Those two quarterly contractions meet the local definition of recession.
While Ireland is already in technical recession, few take this country’s GDP data seriously as an effective measure of the health of the economy given the influence of multinationals funnelling assets through here.
New Zealand was one of the first to begin raising rates when inflation surged after the pandemic, with its Reserve Bank delivering 5.25 percentage points of hikes in less than 20 months – outpacing even the Federal Reserve. Now the impact is starting to be felt as households already grappling with soaring prices see mortgage repayments jump. That may have a read across for the European Central Bank, which is set to raise rates again today, even as the euro zone economy shows signs of slowing.
“The RBNZ may have done too much to rein in inflation,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “The brunt of the slowdown is yet to come. We’re forecasting further contractions over the year ahead.”
New Zealand’s dollar fell after the GDP release. From a year earlier, the economy grew 2.2 per cent, less than the 2.6 per cent median estimate.
Governor Adrian Orr has been arguably the most willing of his peers to accept that a recession may be needed to cool inflation, with the RBNZ forecasting one would come at a time when most other major central bankers focused on the idea that the narrow path to a soft landing remained possible.
For all of the RBNZ’s hawkishness, it was the US yield curve that inverted first, with those for New Zealand and the UK following soon after. Now that the kiwi economy has contracted in two straight quarters, that may further encourage bond investors to sustain their bets that other, larger peers will follow.
Fed officials on Wednesday paused their series of rate hikes but projected borrowing costs will go higher than previously expected, owing to what Chair Jerome Powell called surprisingly persistent inflation and labour-market strength.
The RBNZ had predicted 0.3 per cent growth in the first quarter and a shallow recession in the second and third quarters. The Treasury Department in the May budget withdrew a forecast for three straight quarters of contraction this year, saying tourist arrivals, cyclone recovery work and government spending would support growth.
Confirmation of a recession comes four months before a general election on October 14th in which cost-of-living pressures and the economic downturn are sure to feature. The ruling Labour Party, seeking a third term in office, is neck-and-neck with the main opposition National Party in the latest opinion polls.
“Labour has mismanaged the economy and New Zealanders are paying the price,” said National Party finance spokesperson Nicola Willis. “This recession is a red-light warning. The time for cavalier big-spending, anti-business, anti-growth policies is over.”
Finance Minister Grant Robertson said the economy took a knock from extreme weather events during the quarter, including a cyclone that caused significant damage to key food-producing regions in the North Island.
“Looking ahead, export growth, the tourism rebound, returning international students, migration inflows and investment in the recovery mean the economy is well-positioned to handle challenging times,” he said.
The RBNZ last month said it was done hiking rates after lifting its Official Cash Rate to 5.5 per cent, but it doesn’t expect to start cutting them until the third quarter of next year. The full impact of its tightening is still to be felt as many households have yet to roll mortgages on to higher interest rates.
Still, unemployment at 3.4 per cent remains near a record low, tourism is recovering more rapidly than expected and immigration is surging. And at 6.7 per cent, inflation remains way above the RBNZ’s 1 to 3 per cent target band.
The GDP data may have surprised the RBNZ, but the central bank still has a sticky inflation problem to solve before considering rate cuts, said Miles Workman, senior economist at ANZ Bank New Zealand in Wellington.
“We don’t think today’s noisy data are sufficient to knock the RBNZ off the course it set in May: to ‘watch, worry and wait’ for a period with the OCR at 5.5 per cent,” he said.
The statistics agency said business services was the biggest downward driver in first-quarter GDP, falling 3.5 per cent, while manufacturing declined 1.1 per cent.
Adverse weather events during the quarter, including severe flooding in Auckland and Cyclone Gabrielle, contributed to falls in horticulture and transport support services, and also disrupted education services.
A 2.4 per cent increase in household consumption expenditure was led by New Zealanders spending more on international travel. By contrast, households spent less on goods, particularly grocery food.
On a per capita basis, GDP fell 0.7 per cent in the first quarter and 1.1 per cent in the fourth quarter of last year. – Bloomberg
