Latest GDP figures keep pressure on Reserve Bank

But economy starting to lose steam – economist

Latest GDP figures keep pressure on Reserve Bank

Economic growth is likely to have come in above the Reserve Bank’s expectations, but looking ahead, New Zealanders can expect activity to be sluggish, a bank economist says.

Official figures show that the economy expanded in the second quarter, and revisions show that the  country has narrowly dodged a recession.

Westpac senior economist Satish Ranchhod (pictured above) told NZ Adviser that despite data showing activity was stronger than expected, a “material slowdown” is forecast over the next two years.

According to figures released by Statistics NZ in September, Gross Domestic Product (GDP) was 0.9% for the June 2023 quarter. First quarter growth was also revised up slightly, from -0.1% to 0%.

Over the 12 months to June 2023, GDP rose by 3.2% compared to the year ending June 2022.

Business services were the biggest driver of economic growth, with public administration, safety and defence, rental, hiring and real estate services, and electricity, gas, water and waste among the other industries contributing to growth.

Ranchhod confirmed that the second quarter GDP figures were above market forecasts, coming in a touch higher than Westpac’s forecast of 0.8%. Taking revisions into account, Ranchhod said that over the year, data showed that the economy had been running hotter than previously expected.

“The economy has had a pretty strong period of activity, and it is cooling now as we’ve got higher interest rates, but not as fast as the Reserve Bank might have expected,” he said.

The central bank, which is expected to leave the official cash rate unchanged on Wednesday, is still leaning against some “pretty strong” cyclical pressures.

While two consecutive quarters of negative growth constitute a technical recession, March quarter growth having since been revised to 0%, Ranchhod acknowledged that even at that time, the economy was still operating at a fairly high level, noting unemployment remained low at 3.6%.

“We’ve got revised figures saying we weren’t in a technical recession, but we’re still dealing with the same issues of an economy that’s overheated and starting to lose steam in response to higher interest rates,” Ranchhod said.

Economy forecast to slow further

Westpac forecasts show GDP growth of 1.3% over 2023, and expectations are that economic growth will slow further over 2024, to a rate of around 0.4%.

Due to large interest rate increases delivered to-date, a higher cost of living and other challenges such as a slowdown in China, Ranchhod said that he expected the economy to continue losing steam.

“We are looking at a material slowdown in economic activity over the next couple of years as we grapple with those challenges,” he said.

Interest rates are now at fairly high levels and even as the Reserve Bank has kept the official cash rate on hold, Ranchhod acknowledged that higher overseas funding costs had pushed up fixed mortgage rates for new borrowers.

He acknowledged that a large percentage of households (90%) were on fixed mortgage interest rates and are continuing to roll off onto significantly higher rates. A borrower who fixed for 2 years in 2021 would have locked in a rate of around 2.5% and that same fixed rate would now cost them upwards of 6%.

Overall, June quarter GDP indicates that the economy is an indication the economy is running at a reasonably firm pace with low levels of unemployment, Ranchhod said.

“The trade-off is that we are wrestling with an overheated economy, strong pressure on prices, the current account is still pretty wide, so we need to get those conditions into better balance,” he said.

In its Monetary Policy Statement released in November 2022, the Reserve Bank said that it expected New Zealand to enter recession in 2023, Reserve Bank governor Adrian Orr admitting that the central bank was deliberately trying to engineer a recession to “slow aggregate spending” in its ongoing efforts to tame inflation.

The Reserve Bank will announce its decision on the official cash rate on Wednesday.

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