New Zealand sinks into recession, more rate cuts to come

On By Littum

Buildings in Auckland, New Zealand, Tuesday, September 13, 2022. Photographer: Fiona Goodall/Bloomberg via Getty Images

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New Zealand’s economy slipped into recession in the third quarter as activity plunged far more than expected and output was slashed in the previous quarter, a dire result that cements the case for more aggressive rate cuts.

The shock news sent local dollar to a new two-year low of $0.5614, having already fallen 2.2% in the wake of hawkish easing by the US Federal Reserve.

Markets added to bets the Reserve Bank of New Zealand will cut interest rates further after already cutting 125 basis points to 4.25%. Swaps now implied a 70% probability of a 50 basis point cut in February, with rates seen falling to 3.0% by the end of 2025.

Thursday’s data showed gross domestic product fell 1.0% in the September quarter from the previous quarter, dwarfing market forecasts for a 0.2% decline.

The June quarter was revised to show a 1.1% decline, and two consecutive quarters of decline is the technical definition of recession. Excluding the pandemic, this was the biggest drop in two quarters since the painfully deep downturn of 1991.

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“It was dramatically worse than anyone expected,” said Abhijit Surya, an economist at Capital Economics.

“Given the dire economy, we now believe risks are tilted towards a larger 75bp cut in February,” he added. “We are more confident than ever that the Bank will cut rates to below neutral, eventually to 2.25%.”

The result was well ahead of the RBNZ’s forecast of a 0.2% drop and came just two days after New Zealand’s Treasury had forecast a drop of just 0.1%.

The government had already had to give up hope of a return to budget surpluses as they saw deficits for the next five years.

Finance Minister Nicola Willis on Thursday pointed the finger at the central bank for its role in the economic downturn.

“The decline reflects the impact of high inflation on the economy,” she said in a statement. “It caused the Reserve Bank to develop a recession which has stifled growth.”

Turning the corner?

The weakness was spread across industries and particularly significant in manufacturing, utilities and construction. Household and public expenditure fell in the quarter, while investments and exports also dragged on.

For the year to September, output fell a steep 1.5%, the sharpest fall since the pandemic and well outside forecasts for a 0.4% drop.

As the South Pacific island nation’s population grew by 1.2% to 5.35 million in the year to September, GDP fell per person with an even larger 2.1% for the year.

The picture was complicated by significant revisions by the statistics office, which revised up GDP growth over the two financial years to March 2024 by almost 2 percentage points.

This made the starting point for this year stronger than first assumed. It also erased a recession and a long period of stagnant growth that had contributed to the fall of the previous Labor government.

Analysts were still clinging to hope that the worst was over for the economy as the RBNZ cut borrowing costs by a full percentage point this quarter.

An ANZ survey of businesses out on Thursday showed a further pick-up in activity in December, while confidence remained near historic highs.

“The survey showed more signs that demand is improving, with the first decent lift we’ve seen in past activity, which is the best GDP indicator in the survey,” said Sharon Zollner, head of New Zealand Economics at ANZ.

“The bar for things to improve from here is clearly quite low.”