New Zealand’s economy unexpectedly contracted in the final quarter of last year, confirming a recession and prompting concerns among traders about potential interest-rate cuts. Gross domestic product (GDP) declined by 0.1% in the fourth quarter, following a 0.3% drop in the previous three months, according to government data released in Wellington. This contraction was contrary to economists’ expectations of 0.1% growth. Additionally, GDP shrank by 0.3% compared to the same period in the previous year, which was worse than the anticipated flat growth.
The economy’s downturn signals a double-dip recession, exacerbated by the Reserve Bank of New Zealand’s (RBNZ) aggressive tightening of monetary policy to combat rising inflation. With weak growth persisting, there is increasing pressure on policymakers to consider adjusting interest rates earlier than previously indicated.
The RBNZ has maintained the Official Cash Rate (OCR) at 5.5% since May, with indications that it would not consider lowering rates until 2025, citing factors such as record immigration and persistent core inflation. However, the unexpected GDP contraction has shifted expectations, leading economists to anticipate potential OCR cuts starting in the latter half of 2024.
Following the release of the GDP data, expectations of rate cuts surged, as evidenced by a decline of 8 basis points in the yield on two-year bonds sensitive to policy changes, reaching 4.52%, the lowest level since January 16. Initially, the New Zealand dollar also depreciated, extending its year-to-date decline to 4%, before rebounding as the US dollar weakened. By midday in Wellington, the kiwi dollar was trading at 60.88 US cents.
The growing pressure on New Zealand to reassess its monetary policy stance coincides with the Federal Reserve’s decision to maintain its outlook for three rate hikes this year, while the Reserve Bank of Australia recently abandoned its tightening bias. Additionally, RBNZ officials have hinted at the possibility of earlier rate cuts if the Fed eases policy later in the year. The International Monetary Fund (IMF) also sees room for OCR reductions later in 2024.
While only a minority of economists had anticipated a contraction in GDP, most had expected either growth or stagnation. The RBNZ’s own forecast had predicted unchanged GDP for the quarter. The economy’s contraction in the fourth quarter of 2023 follows similar declines in the final quarter of 2022 and the first three months of 2023.
The main drivers behind the fourth-quarter contraction were reductions in manufacturing, retail, and machinery sales, according to the statistics agency. However, net exports experienced an increase during this period.
Furthermore, GDP per capita also experienced a decline of 0.7% compared to the previous quarter, marking the fifth consecutive quarterly decrease. This trend underscores the persistent challenges facing New Zealand’s economy despite efforts to stimulate growth.
In response to the unexpected contraction, there has been speculation among economists and investors about the potential implications for New Zealand’s economic outlook. Concerns about the sustainability of growth and the effectiveness of current monetary policy measures have led to calls for a reassessment of the country’s economic strategy.
Looking ahead, policymakers face the challenge of balancing inflationary pressures with the need to support economic recovery and stability. The timing and extent of any potential policy adjustments will depend on a range of factors, including domestic economic conditions, global market dynamics, and developments in inflationary pressures.
Overall, the unexpected contraction in New Zealand’s GDP highlights the ongoing uncertainty and volatility facing the global economy, underscoring the importance of adaptive and responsive policy measures to navigate these challenges effectively.
