New Zealand’s economy falls in Q4

New Zealand’s economy shrank 0.6% in Q4, according to official data released on Thursday, missing analysts’ estimates and raising the likelihood of a recession. Gross domestic product fell below the Reserve Bank of New Zealand’s estimate of 0.7% growth and economists believe the broad-based weakness of the economy means a recession may already be occurring. This comes after two quarters of recession in 2020 when COVID-19 hit. The weakness is also a setback for the central bank, which has already implemented an aggressive tightening policy in a bid to curb inflation.

According to Statistics New Zealand data, conditions are already recessionary for manufacturing, retail, trade and accommodation. Economists believe severe weather in January and February is likely to have a further impact on the economy in Q1, making the outlook for the period gloomy. Regardless of whether a recession is confirmed, the economy is less overheated than expected by the RBNZ.

The market is now betting the central bank’s plan to hike the official cash rate by a further 75 basis points this year to 5.5% by the third quarter will be pared back. The RBNZ has already raised the official cash rate by 450 basis points since October 2021 to 4.75% in its most aggressive policy tightening since 1999. Some experts have argued that there is no need for the RBNZ to hike the rate to 5.5%, which could risk harming employment and activity.

NZ bank bill futures have surged as the market priced in a lower peak for RBNZ rates, with two-year swaps near a two-month low of 4.925%. The market is now 50-50 on whether the RBNZ hikes 25 basis points in April, while the terminal rate is seen at 5.11%. The New Zealand dollar was down before the data, falling 0.6% to $0.6145. Financial market jitters overseas have added to uncertainty, leading to suggestions for the RBNZ to postpone rate hikes. ASB Bank has already revised its prediction of a 50 basis point April OCR hike to a 25 basis point hike.