Home Finance Second Recession in Less Than 18 Months Subdues New Zealand’s Economic Outlook

Second Recession in Less Than 18 Months Subdues New Zealand’s Economic Outlook

by internationalbanker

By Hilary Schmidt, International Banker


Largely against expectations, New Zealand’s economy registered a contraction for 2023’s final quarter. Gross domestic product (GDP) declined by 0.1 percent during the October-December period from the previous quarter, during which a 0.3-percent drop was recorded. The two consecutive quarters of negative growth meant that New Zealand’s economy had tipped into a recession for the second time in less than 18 months. With inflation still well above formal targets, moreover, the chance of a quick fix to the Pacific Islands nation’s economic woes seems increasingly remote.

With analysts expecting quarterly growth of only 0.1 percent for the fourth quarter (Q4), as well as flat growth in annual GDP (which ended up registering a 0.3-percent contraction from the same quarter a year earlier), the New Zealand economy was viewed as in danger of slipping into negative growth territory even before it did so. “The final quarter of 2023 wrapped up a turbulent year for New Zealand as a second-straight drop in GDP put the country back into a technical recession,” according to Shannon Nicoll, associate economist at Moody’s Analytics, adding that a subdued global picture and restrictive monetary policy meant New Zealand spent 2023 “almost jogging on the spot”.

Indeed, at just 0.6 percent, annual GDP growth over the past year has been well below New Zealand’s historical average of 2.5 percent. “This is the fourth quarter in the last five where the economy has contracted. Since the economy peaked in September 2022, output has shrunk by a cumulative 0.7 percent or so,” according to an economist for New Zealand’s ASB Bank, Nathaniel Keall, who cited the “prolonged manufacturing recession” as a key factor in the economy’s enduring underperformance, along with weaker retail and wholesale activity.

The country’s official data agency, Statistics New Zealand (branded as Stats NZ), meanwhile, noted that wholesale trade was the largest downward driver for the quarter, led by falls in grocery and liquor wholesaling and machinery and equipment wholesaling. Retail-trade activity also declined due to contractions in furniture, electrical and hardware, as well as food and beverage. Retail trade and accommodation fell 0.9 percent, while wholesale trade fell 1.8 percent. Stats NZ also stated that just eight out of sixteen industries saw increased activity, including rental, hiring, real estate, public administration, safety and defence.

What’s more, per capita GDP figures only compounded this poor performance, with last year’s record net migration to the country, which included 141,000 new arrivals (largely to help alleviate labour-market shortages), resulting in an average 0.8-percent GDP contraction per quarter over the last five quarters. Economic output on a per-person basis, therefore, has progressively declined for well over a year.

“As we’ve consistently emphasised, this slowdown has taken place at a time when population growth into New Zealand continues to prove exceptionally strong by historical standards,” Keall added, noting that headline GDP figures flattered the economic picture and “masked the underlying weakness”, as quoted by Radio New Zealand (RNZ), the country’s public broadcaster. “Deteriorating output in the goods-producing sectors of the economy (down 0.1 percent) again underpinned the soggy economic performance. Manufacturing declined another 0.4 percent (off the back of a chunky 3.6 percent fall in Q3), having now shrunk for seven of the last eight quarters.”

Many attribute this double-dip recession to the Reserve Bank of New Zealand’s (RBNZ’s) aggressive cycle of interest-rate hikes beginning in October 2021 to control accelerating inflation. Although the annual inflation rate has been brought down from a cycle peak of 7.3 percent in the second quarter (Q2) of 2022, it remained at 4 percent as of the January-March 2024 quarter. This is well above the central bank’s official target, which is required by the government to be maintained between 1 percent and 3 percent over the medium term, with a focus on the 2-percent midpoint.

The benchmark official cash rate (OCR) has been maintained at 5.5 percent since May 2023 as the central bank continues its efforts to bring inflation within its target range without inflicting a hard landing on the economy. The emergence of a second technical recession in less than two years, however, suggests that this task is proving a distinct challenge, as is the case across much of the world as it continues to face sticky inflation. “The weakness we’re seeing and feeling is all by RBNZ design,” according to Kiwibank’s chief economist, Jarrod Kerr. “The RBNZ needs to restrain the economy in their fight against the inflation beast. And today, they got that. Well, they got more than that.”

According to the International Monetary Fund (IMF), the slower progress New Zealand’s policymakers have made in reducing inflation compared to other economies can be explained by several key issues, including delayed pass-throughs from pandemic-era shocks, weather-related domestic food shortages, tight labour markets, persistent wage pressures and the effects of migration on rental and housing costs. “More recently, global disinflation helped reduce headline inflation, but trimmed-mean and non-tradable inflation are more persistent,” the IMF noted on March 19, at the conclusion of its monitoring mission to the country. “Importantly, however, inflation expectations remain anchored, and there is no indication of a wage-price spiral.”

And although a recession has transpired, the RBNZ’s Monetary Policy Committee (MPC) did note that GDP for Q4 2023 was “close to expectations”, suggesting that the economy could well experience a continued easing in capacity pressures. “Some higher frequency indicators suggest a modest recovery in activity in the first quarter of 2024,” the summary of the committee’s April meeting noted. “However, measures of business confidence have declined, and firms’ own expectations for activity and investment have weakened. Near-term business pricing intentions have declined but remain elevated, in part reflecting an uptick in both realised and expected costs.”

New Zealand’s minister of finance, Nicola Willis, meanwhile, has attributed the recession to the “big spending, big taxing” policies of the former Labour Party government, which lost power in the October 2023 general elections. “It is concerning that we are in recession even despite our rapidly growing population,” Willis, from the centre-right National Party, said. “This simply reinforces that our approach to strengthening and growing the economy is the right one. The good news is that inflation is tracking in the right direction.”

Labour’s finance spokesperson, Barbara Edmonds, however, has pointed to the government’s failure to address ordinary citizens’ struggles with sharply rising costs of living. “Instead of policies to make childcare more affordable, making most prescriptions free, or half-price public transport, this Government has just spent nearly $3bn on landlords and is still planning tax cuts that won’t benefit working people in the way they promised,” Edmonds said.

Willis did acknowledge the painful situation during her first Budget Speech. “What is apparent now, compared to six months ago, is that the current downturn started earlier, has been deeper, and is expected to last for longer, than previously thought. In this environment, I feel for families and businesses across the country who are doing it tough,” Willis noted during the speech delivered on May 30. “Forecasts in the Budget Update indicate that current weakness in the economy will reduce inflation pressures, and lead to a gradual easing of interest rates. The Treasury expects the unemployment rate to peak at the end of 2024 and start of 2025, before beginning to fall. As interest rates ease, economic growth is forecast to pick up over the second half of 2024 and continue in 2025.”

But when exactly interest rates will come down remains difficult to predict. According to Nathaniel Keall, the economic downturn may prompt RBNZ to begin cutting rates earlier than mid-2025, as expected. ASB Bank predicted the first OCR cut would materialise in the second half of 2024. “We caution that the weak growth over the past 18 months has still coincided with relatively high inflation, and the supply-side capacity of the economy will remain hugely material in how quickly inflation will fall from here,” Keall said.

Westpac’s senior economist, Michael Gordon, meanwhile, said that the latest disappointing GDP figures suggest there is now “slightly less need” to maintain the currently high rates for an extended period. “That said, the scale of the surprise for the RBNZ is less than we saw in the September 2023 release [for the Q3 quarter of 0.3 percent negative growth], which the RBNZ has tended to downplay,” Gordon also warned, adding that the coalition government’s first budget in May is one for analysts to monitor closely.

“The New Zealand economy continues to evolve as anticipated by the Monetary Policy Committee. Current consumer price inflation remains above the Committee’s 1 to 3 percent target range. A restrictive monetary policy stance remains necessary to further reduce capacity pressures and inflation,” the MPC noted at its latest meeting on April 10. “Economic growth in New Zealand remains weak. While some near-term price pressures remain, the Committee is confident that maintaining the OCR at a restrictive level for a sustained period will return consumer price inflation to within the 1 to 3 percent target range this calendar year.”


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