New Zealand Faces Technical Recession as Economic Decline Continues

New Zealand has entered a technical recession, with the economy shrinking by 0.1% in the first quarter of 2023, following a revised contraction of 0.7% in the final quarter of 2022, according to data from Stats NZ. This downturn marks the country’s second consecutive quarter of economic decline, falling in line with market expectations. Following the announcement, the New Zealand dollar experienced a dip, with the two-year swap rate also recording a minor decrease. However, despite the economic shrinkage, it’s noteworthy that the quarterly decline was less pronounced than in late 2022.

Sector Performance

Stats NZ reported that over half of the industries saw a decrease in the March 2023 quarter. Business services experienced the most significant downward drive, contracting by 3.5%. In contrast, a 2.7% increase was observed in the information media and telecommunications sectors. Specifically, management consulting, advertising, scientific, and engineering design services were the primary contributors to the fall in business services. On the other hand, household consumption expenditure saw a 2.4% increase, while investment in fixed assets grew by 2%, offsetting some of the economic declines.

External Factors Influencing Economy

The economic contraction also reflects the initial impacts of Cyclones Hale and Gabrielle and teachers’ strikes. These adverse weather events disrupted horticulture, transport support services, and education services, causing significant economic setbacks. Despite the economic shrinkage, Finance Minister Grant Robertson asserted that the economy is still resilient. However, Nicola Willis, National’s finance spokesperson, expressed concerns over the state of the economy, labeling it as “incredibly fragile.”

Economic Outlook

Economists warn of an awkward economic outlook, forecasting further economic contractions over 2023 and potentially into 2024. This projected slowdown may cause a loosening in the labor market, leading to a potential increase in the unemployment rate, which may rise to between 5-5.5% in 2024.

Monetary Policy

On the monetary front, the Reserve Bank of New Zealand (RBNZ) maintains that no further interest rate hikes may be necessary. The downturn in the economy may strengthen RBNZ’s stance, as ASB economist Nathaniel Keall pointed out, stating that weaker economic prints may not discourage RBNZ from its current position. Kiwibank economists predict the brunt of the slowdown is yet to come, indicating that the Reserve Bank may have overextended its efforts to curb inflation. ASB economists, on the other hand, suggest the downturn would have been worse if not for a surge in migration.

Reserve Bank’s Position

It’s worth noting that the 0.1% fall in GDP was in line with economists’ average forecasts, but it fell short of the 0.3% GDP expansion forecast by the Reserve Bank.  Chief economist Jarrod Kerr from Kiwibank suggested that the Reserve Bank’s aggressive measures to slow inflation have potentially contributed to the economic decline. His team had previously flagged this as a risk, expressing concern that the economy was turning, and the turn had been faster than expected. Kerr stated that his team’s position remains that if the official cash rate had risen above 5%, it could have been too much. “We’re starting from a much weaker position; the economy is smaller than all of us thought it would be. The worst is yet to come, unfortunately. The rate rises that they delivered last year and this year will take up to two years to feed through to the economy,” he said.

The Influence of Migration

ASB economists point out the role of migration in mitigating the economic downturn. They suggest that the downturn would have been more severe without the surge in migration. However, on a per capita basis, the contraction has been quite a bit steeper – down 1.1% last quarter and 0.7% this quarter.

Future Projections

The Reserve Bank had forecast 0.3% GDP growth for the March quarter in its May Monetary Policy Statement and projected the economy to contract modestly afterward. The bank projected flat annual GDP growth at 0.0% for the year to the December 2023 quarter. While the economy faces some uncertainty, there’s hope that with the combination of fiscal stimulus, changes in immigration, and the strategic monetary policies of the Reserve Bank, the economy can navigate the challenging times ahead. 

Conclusion

 The technical recession, coupled with ongoing global and domestic challenges, creates a complex scenario. With economists forecasting a continuation of the slowdown and the RBNZ maintaining a steady monetary policy, the country will need to demonstrate resilience and adaptability to navigate through the economic headwinds ahead. Despite the current contraction, the resilience of the New Zealand economy and its ability to rebound from downturns should not be underestimated.