New Zealand economy unexpectedly shrank in Q1 as Covid-19 spread

WELLINGTON (BLOOMBERG) - New Zealand's economy unexpectedly contracted in the first quarter as Covid-19 ran rampant through the population for the first time and interest rates rose in response to soaring inflation.

Gross domestic product fell 0.2 per cent from the fourth quarter, when it gained 3 per cent, Statistics New Zealand said on Thursday (June 16). Economists had forecast a 0.6 per cent increase.

From a year ago, the economy expanded 1.2 per cent, just half the 2.4 per cent predicted by economists and cooling from its 3.1 per cent annual pace in the previous quarter.

The slowdown is unlikely to deter the Reserve Bank of New Zealand from raising borrowing costs further to get control of inflation, which may exceed 7 per cent this quarter. With house prices falling and global uncertainty elevated, some economists say the risk of a recession in 2023 is rising.

The New Zealand dollar fell as much as 0.4 per cent after the data. It bought 62.77 US cents at 11.28am in Wellington, down from 62.84 cents beforehand. Bond yields and swap rates fell, with the yield on two-year government debt extending its decline to 17 basis points.

Expectations for quarterly GDP varied widely. Three of New Zealand's biggest banks tipped zero growth, while the central bank forecast a 0.7 per cent expansion. Only one of 18 surveyed economists called a contraction.

The economy was disrupted in the first three months of the year, when Covid-19 swept the entire country for the first time. This left many industries short of staff and customers as people isolated or worked from home.

At the same time, the tourism industry was struggling behind a closed border and soaring fuel and food costs began to damp discretionary spending. The government cut fuel taxes in mid-March to provide relief for consumers and began progressively opening the border to foreign visitors from April.

The Reserve Bank, which started raising rates in October, last month announced a second successive half-percentage point hike. It increased the official cash rate to 2 per cent and signalled that it wanted to raise the benchmark "at pace" towards 4 per cent.

Most economists see another half-point increase in July but many tip quarter-point adjustments thereafter as higher borrowing costs start to squeeze households.

House prices dropped 5.6 per cent in the three months to May as higher mortgage rates started to bite, the Real Estate Institute of New Zealand said on Wednesday.