NZ economy shrinks in Q4, changes rate outlook

Pedestrians walk past the Reserve Bank of New Zealand building on Saturday, June 22, 2019. The Reserve Bank of New Zealand raised interest rates for the sixth time in a row on Wednesday and said it remained comfortable with a planned aggressive tightening path as the authorities sought to reduce the impact of runaway inflation on a second round of rate hikes.

Birgitte Kripner | Bloomberg | Getty Images

New Zealand’s economy shrank 0.6 percent in the fourth quarter, official data showed on Thursday, raising the prospect of a recession and reducing the chances of further interest rate hikes.

Gross domestic product missed analysts’ expectations for a 0.2% contraction in the December quarter and fell well short of the Reserve Bank of New Zealand’s 0.7% growth forecast. This was in contrast to a revised 1.7% growth rate in the third quarter.

According to Statistics New Zealand, the economic weakness is wide-ranging, with manufacturing, retail, trade and accommodation already in recession.

Both the central bank and the finance ministry had forecast the country would enter a mild recession in the second quarter of 2023.

Economists said Thursday’s weak data meant the country may have slipped into recession, especially given the likely impact on the economy from bad weather in January and February.

“The outlook for the first quarter remains bleak,” Capital Economics said in a note.

New Zealand experienced two quarters of recession in 2020 due to severe restrictions imposed during the Covid-19 pandemic, but before that, the economy had not contracted since late 2010.

Regardless of whether the country is entering a recession, the economy is not as overheated as the Reserve Bank of New Zealand (RBNZ) expected.

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Since the introduction of the official cash rate in 1999, the central bank has adopted the most aggressive tightening policy since 1999, raising the official cash rate by 450 basis points to 4.75% since October 2021.

Markets are betting that the Reserve Bank of New Zealand’s plan to raise the official cash rate by another 75 basis points to 5.5% in the third quarter of this year will be scaled back.

“We see no need for the RBNZ to move to 5.50%, which could lead to unnecessary losses in activity and employment,” Citi analysts said in a note, forecasting a contraction in GDP in the first and second quarters.

Bank of New Zealand bill futures surged as the market priced in a lower peak in RBNZ interest rates. The market is now 50-50 on whether the RBNZ will raise interest rates by 25 basis points in April, with the final rate expected to be 5.11% instead of the bank’s forecast of 5.5%.

The New Zealand dollar fell ahead of the data, but extended losses to trade 0.6 percent at $0.6145. The two-year swap rate was near a two-month low of 4.925%, having fallen sharply overnight as banking concerns weighed on global bond yields.

ASB Bank said in a note that weaker data and heightened jitters in overseas financial markets suggested the Reserve Bank of New Zealand had less urgency to raise interest rates.

“Uncertainty has risen, but we have lowered our forecast for a 50 basis point OCR hike in April to 25 basis points,” the report said.

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