New Zealand economy slips into recession, currency drops

WELLINGTON – New Zealand’s economy contracted in the first quarter, confirming that a recession began in the final three months of 2022 and sending the local currency lower.

Gross domestic product (GDP) fell 0.1 per cent from the fourth quarter, when it dropped a revised 0.7 per cent, Statistics New Zealand said on Thursday. Economists expected a 0.1 per cent decline.

From a year earlier, the economy grew 2.2 per cent, less than the 2.6 per cent median forecast.

The economy is cooling after the central bank hiked interest rates at a record pace to regain control of inflation, while first-quarter activity was also hampered by a damaging cyclone in February.

Confirmation of a recession comes four months before an Oct 14 general election where cost-of-living pressures and the economic downturn are sure to feature.

The New Zealand dollar fell after the GDP release. It bought 61.94 US cents at 11.24am in Wellington from 62.18 cents beforehand.

The Reserve Bank of New Zealand (RBNZ) predicted 0.3 per cent growth in the first quarter and small contractions in the second and third quarters.

The Treasury Department in the May budget withdrew a forecast for three straight quarters of contraction in 2023, saying tourist arrivals, cyclone recovery work and government spending would support growth.

“Our economy is smaller than forecast by the RBNZ and Treasury,” said Mr Jarrod Kerr, chief economist at Kiwibank in Auckland. “And the brunt of the slowdown is yet to come. We’re forecasting further contractions over the year ahead.”

The RBNZ has hiked its official cash rate by 5.25 percentage points in the past 20 months to 5.5 per cent, with the full impact still to be felt as many households have yet to roll mortgages onto higher interest rates.

At the same time, unemployment at 3.4 per cent remains near a record low, tourism is recovering more rapidly than expected and immigration is surging.

The statistics agency said business services were the biggest downward driver in first-quarter GDP, falling 3.5 per cent.

It added that adverse weather events during the quarter, including severe flooding in Auckland and Cyclone Gabrielle, contributed to falls in horticulture and transport support services, and also disrupted education services.

A 2.4 per cent increase in household consumption expenditure was led by higher spending by New Zealanders on international travel.

By contrast, households spent less on goods, particularly grocery food. BLOOMBERG