NZ on brink of recession after economy contracts

Tough times: Pedestrians near the entrance of the RBNZ. A sharp slowdown could prompt the RBNZ to further slow the pace of monetary tightening. — Reuters

WELLINGTON: New Zealand’s economy contracted by more than expected in the final three months of 2022, putting the nation on the brink of recession and sending the currency lower.

Gross domestic product fell 0.6% from the third quarter, when it gained a revised 1.7%, according to Statistics New Zealand.

Economists forecast a 0.2% drop.

From a year ago, the economy expanded 2.2%, compared with the median estimate of 3.3% growth.

Should it fail to expand in the current cyclone-hit quarter, as some economists forecast, the country would have entered a recession six months earlier than the Reserve Bank of New Zealand (RBNZ) predicted.

Evidence of a sharp slowdown could prompt the RBNZ to further slow the pace of monetary tightening or stop before it reaches its forecast peak.

Most economists predict a 25 basis-point hike at its next review on April 5 and investors have pared bets on the RBNZ delivering a 50-point hike.

The repricing gathered pace this week after the collapse of Silicon Valley Bank in the United States, which has damped expectations for further interest-rate increases from the Federal Reserve.

“The crucial thing for the RBNZ is that the starting point for the economy is substantially less stretched than they thought,” said Michael Gordon, acting New Zealand chief economist at Westpac Banking Corp in Auckland.

“And that matters for how much of a slowdown is needed to bring inflation back under control.”

New Zealand’s dollar dropped after the release.

It bought 61.57 US cents (RM2.76) in Wellington from 61.86 US cents (RM2.77) beforehand.

The RBNZ, which is aiming to engineer a recession in 2023 to suppress demand and rein in inflation, predicted growth of 0.7% for the fourth quarter.

The central bank had forecast the country would enter recession in the second quarter of this year.

The earlier slump in economic growth adds to signs that higher rates are starting to curb consumption and could slow inflation faster than the RBNZ expects.

That suggests the central bank needn’t be as aggressive with rate hikes as it projected last month, when it lifted the Official Cash Rate by 50 basis points to 4.75% and maintained a forecast that it will reach 5.5% this year.

The fourth-quarter contraction was led by the primary sector and goods-producing industries such as manufacturing, the statistics agency said. — Bloomberg