Buildings in Auckland, New Zealand, Tuesday, September 13, 2022.
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New Zealand’s economy slipped into recession in the third quarter as activity fell sharply and output was slashed last quarter, a dire outcome that set the stage for further steep interest rate cuts.
Shocking news comes out local dollar The currency has fallen 2.2% to a two-year low of $0.5614 after the Federal Reserve adopted hawkish easing policies.
The market has increased bets that the Bank of New Zealand will further cut interest rates, after having already cut interest rates by 125 basis points to 4.25%. Swaps currently imply a 70% chance of a 50 basis point rate cut in February, with rates expected to fall to 3.0% by the end of 2025.
Data on Thursday showed gross domestic production fell 1.0% in the September quarter, dwarfing market forecasts for a 0.2% contraction.
The June quarter was revised to show a 1.1% decline, two consecutive quarters of declines the technical definition of a recession. Pandemic aside, it was the biggest two-quarter decline since the painful deep recession of 1991.
“It’s worse than anyone expected,” said Abhijit Surya, an economist at Capital Economics.
“Given the tough economic picture, we now see risks tilting towards a sharp 75 basis point rate cut in February,” he added. “We are more confident than ever that the central bank will cut interest rates below neutral, ultimately to 2.25%. “
The result far exceeded the New Zealand Federal Reserve Bank’s forecast of a 0.2% fall, and just two days ago the New Zealand Treasury forecast a fall of just 0.1%.
The government has had to give up hope of returning to a budget surplus, with deficits expected over the next five years.
Finance Minister Nicola Willis on Thursday blamed the central bank for its role in the economic contraction.
“The decline reflects the impact of high inflation on the economy,” she said in a statement. “This resulted in the Reserve Bank orchestrating a recession that stifled economic growth.”
Turn the corner?
Weakness spread across sectors, especially manufacturing, utilities and construction. Household and government spending fell in the quarter, with investment and exports also being dragged down.
Output fell sharply by 1.5% in the year to September, the biggest fall since the pandemic began and well ahead of forecasts for a 0.4% decline.
The South Pacific island nation’s population grew by 1.2% in the year to September, to 5.35 million, causing gross domestic product per capita to fall by 2.1% for the year.
The situation is further complicated by a sharp revision by the National Bureau of Statistics, which raised GDP growth by nearly 2 percentage points for the two fiscal years ending in March 2024.
This makes the start of the year stronger than originally thought. It also eliminated the recession and long-term growth stagnation that brought down the previous Labor government.
With the Bank of New Zealand cutting borrowing costs by a full percentage point this quarter, analysts are clinging to hope that the worst is over for the economy.
An ANZ business survey released on Thursday showed economic activity recovered further in December, with confidence remaining near record highs.
Sharon Zollner, ANZ’s head of New Zealand economics, said: “The survey showed more signs of demand recovery, the first significant increase we have seen in past activity and the best in the survey. GDP indicator.
“The bar for improvement from here is obviously pretty low.”
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