Slow growth: A shopper walks past a jewellery store in Auckland, New Zealand. The country has entered its second recession in 18 months after the latest round of GDP figures confirmed its economy contracted in the last quarter of 2023. — AP
WELLINGTON: New Zealand’s economy shrank slightly in the fourth quarter (4Q), putting the country into a technical recession and increasing the possibility the central bank might cut rates sooner than forecast.
Official data out yesterday showed gross domestic product (GDP) fell 0.1% in the December quarter, worse than analysts’ forecast of a 0.1% increase. It followed a 0.3% contraction in the third quarter meaning the country is now in a technical recession.
GDP decreased 0.3% year-on-year, missing the market expectation of a 0.1% increase. The fall in GDP was driven by weaker retail and wholesale trade and ongoing softness in the manufacturing sector.
The central bank was forecasting no growth in the quarter and ongoing softness in GDP will likely reassure the Reserve Bank of New Zealand (RBNZ), which has repeatedly said it needs slower growth to dampen inflation and inflation expectations.
“Since mid-2022 the economy has experienced a sizable deterioration in momentum that has erased most of the initial strength of the early post-Covid recovery,” ASB Economist Nathaniel Keall said in a note.
He added the downward surprise for GDP tilted the balance in favour of cash rate cuts coming sooner than the mid-2025 time frame flagged at the RBNZ’s February meeting.
The market impact of the data was completely swamped by the global reaction to a Federal Reserve (Fed) meeting that was considered dovish by investors, sending bond yields lower.
The New Zealand dollar dipped slightly to $0.6069, but that followed a 0.5% rally overnight following the Fed news.
Likewise, two-year swap rates steadied at 4.72.50%, having dived 23 basis points on Wednesday.
September bank bill futures jumped 13 ticks to 94.83, but most of that tracked the move in US markets.
Markets now imply a 55% chance the RBNZ will cut its 5.5% cash rate in July, with a quarter-point move more than fully priced for August.
Swaps imply almost 82 basis points of easing for all of 2024, even though the RBNZ has said it was unlikely to cut until well into 2025.
The RBNZ has undertaken its most aggressive policy tightening since 1999, having lifted the cash rate by 525 basis points since October 2021 to 5.50%.
In February, it signalled a small possibility it could raise rates higher if it decides inflation and inflation expectations are not heading towards its target band of 1% to 3%.Westpac senior economist Michael Gordon said while the GDP print suggested slightly less need to keep monetary policy tight for an extended period, there was a lot that could happen before the RBNZ’s next meeting in May. — Reuters
