The NZ economy is smaller – Kiwibank

The economists predict double-dip recession

The NZ economy is smaller – Kiwibank

New Zealand’s economy contracted by -0.3% in the third quarter, marking a technical recession as the technical recession over the last summer that was “technically” revised away was reverted, according to Kiwibank economists.

“The recession they told us we had, then never had, appears we had to have. And it will most likely be a double-dip recession,” said Kiwibank’s Jarrod Kerr, chief economist, Mary Jo Vergara, senior economist, and Sabrina Delgado, economist (pictured from left to right).

Double-dip recession concerns

With the latest Stats NZ report showing a -0.3% contraction in Q3, below Kiwibank’s forecast of +0.2%, the economists are now forecasting a double-dip recession, anticipating a second contraction in Q4, and probably in Q1 next year as well.

“The point here is simple. We have a smaller economy. And the government has a smaller tax base,” they said. “The economy is a lot smaller than RBNZ forecasts. Inflation pressures are also likely to be less intense, given the falls in production. And all of this was despite the colossal surge in migration. 

“We expect further contractions in economic activity over 2023, and possibly into 2024. Demand is being weighed down by rising interest rates. If households spend less, which is what we are seeing, then the economy will contract harder.  If businesses pull back on their hiring and investment, which is what we’re hearing, then the economy will contract harder.” 

Examining it on a per capita basis revealed a significant 0.9% contraction in Q3, contributing to an annual economic decline of more than 3%. This clearly shows that RBNZ’s restrictive monetary policy is working, the economists said.

Financial markets swiftly responded to the weak economic numbers, experiencing considerable drops in rates and a slight decline in the currency.

Migration and economic impact of RBNZ policies

Despite a surge in migration, New Zealand's economic resilience is being challenged by high-interest rates and the restrictive RBNZ policies, impacting both households and businesses.

The weakness observed in goods-producing industries, particularly in manufacturing (-3.4%), electricity, gas, and waste services (-2.5%), and construction (-1.7%), contributed to the economic downturn. However, primary industries (+0.6%), led by agriculture (0.8%), showed modest growth.

The services sector rose by 0.4% in the quarter, yet significant weaknesses were evident. The transport, postal, and warehousing group saw a substantial 4.5% contraction, largely influenced by a 4.1% decline in goods exports, reflecting the challenges posed by a softening global backdrop.

Wholesale trade experienced a nearly 2% decline, and retail trade, along with accommodation, saw a 0.2% decrease. This pattern persists, with elevated interest rates contributing to subdued demand and reduced output.

“Perhaps the few areas where our surging net migration have overcome the effects of high interest rates and had an impact are on the rental hiring and real estate group, up 1%, and the health care group, up 2.3%,” the Kiwibank economists said. “Beyond this however, the message is clear. High interest rates: 1, surging net migration: 0.” 

In terms of expenditure GDP, there was an even deeper contraction of -0.7% in the quarter, with household consumption and business investment both experiencing declines. Despite strong migration, the economic outlook remains soft, and the country is expected to slip into a recession.

Outlook for the NZ economy

The Kiwibank economists anticipate RBNZ to likely keep the cash rate at 5.5%, with rate cuts the potential next move, just not for a while yet.

“We don’t believe further hikes to the cash rate are necessary,” they said. “Forward looking economic indicators point to a cooling domestic economy, inflation continues to move south, and the labour market is softening fast. Monetary policy is restrictive enough.”

The economists penned in a rate cut in November – a year ahead of RBNZ projections, although they said an earlier move is also possible.

The Kiwi currency experienced a notable increase but faces uncertainty amid global economic conditions. The overall economic outlook remains uncertain, with concerns about inflation, interest rates, and the impact on households and businesses, Kiwibank reported.

To read the full Kiwibank article, click here.

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