New Zealand on brink of recession after economy contracts

From a year ago, the economy expanded 2.2 per cent, compared to the median estimate of 3.3 per cent growth. PHOTO: PEXELS

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 (GDP) fell 0.6 per cent from the third quarter, when it gained a revised 1.7 per cent, Statistics New Zealand said on Thursday.

Economists had forecast a 0.2 per cent drop.

From a year ago, the economy expanded 2.2 per cent, compared with the median estimate of 3.3 per cent 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 US Federal Reserve.

“The crucial thing for the RBNZ is that the starting point for the economy is substantially less stretched than they thought,” said Mr Michael Gordon, acting New Zealand chief economist at Westpac Banking Corp. “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 at 11.15am in Wellington from 61.86 cents beforehand.

The RBNZ, which is aiming to engineer a recession in 2023 to suppress demand and rein in inflation, predicted growth of 0.7 per cent for the fourth quarter. The central bank had forecast the country would enter recession in the second quarter of 2023.

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.

This suggests the central bank need not be as aggressive with rate hikes as it projected in February, when it lifted the official cash rate by 50 basis points to 4.75 per cent and maintained a forecast that it will reach 5.5 per cent in 2023.

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

Manufacturing was the biggest contributor, falling 1.9 per cent from the third quarter, led by machinery, food and beverages.

Exports dropped 2.2 per cent as falls in meat and dairy shipments were offset by a lift in tourist arrivals. BLOOMBERG

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