Buildings in Auckland, New Zealand, on Tuesday, September 13, 2022. Photographer: Fiona Goodall/Bloomberg via Getty Images
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New Zealand’s economy sank into recession in the third quarter, with activity plunging more sharply than expected and output shrinking in the previous quarter, as the dismal results strengthen the case for more aggressive rate cuts.
Terrible news sent local dollar To a two-year low of $0.5614, they have already fallen 2.2% on the back of a hawkish rally. US Federal Reserve.
Markets added to bets by the Reserve Bank of New Zealand would cut rates further, having already cut 125 basis points to 4.25%. The swaps now assumed a 70% chance 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 September from the previous quarter, undercutting market expectations for a 0.2% contraction.
The June quarter was revised down to 1.1%, and two quarters in a row is the technical definition of recession. Excluding the pandemic, this was the largest two-quarter drop since the deep recession of 1991.
“It was dramatically worse than anyone expected,” said Abhijit Surya, an economist at Capital Economics.
“Given the dire state of the economy, we now believe risks tilt to a further 75bp cut in February,” he added. “We are more confident than ever that the Bank will cut rates below neutral, eventually to 2.25%.”
The result was well ahead of the 0.2% fall expected by the RBNZ, and came two days after the New Zealand Treasury announced a drop of just 0.1%.
The government has already had to give up hope of returning to budget surpluses, given the 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 contraction.
“The decline reflects the impact of high inflation on the economy,” he said in a statement. “This prompted the Reserve Bank to develop a recession that has stifled growth.”
Turning the corner?
Weakness spread across industries and was particularly pronounced in manufacturing, utilities and construction. Household and government spending fell in the quarter, investments and exports also dragged down.
In the year to September, output fell 1.5%, the biggest drop since the pandemic and 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 per person grew by an even higher 2.1% year-on-year.
The picture was complicated by major revisions by the statistics office, which revised GDP growth in both fiscal years up to March 2024 by almost 2 percentage points.
This made this year’s starting point stronger than expected. It also erased the recession and long stagnant growth that led to the fall of the former Labor government.
Analysts expected the worst was over for the economy yet, with the RBNZ cutting borrowing costs by a full percentage point this quarter.
An ANZ survey of companies released on Thursday showed a further recovery in activity in December, while confidence remained close to historic highs.
“The survey showed further signs of a recovery in demand, with the first decent increase we’ve seen in activity in the past, which is the best indicator of GDP in the survey,” said Sharon Zollner, ANZ’s chief economist for New Zealand.
“The bar for improving things from here is pretty low.”
