New Zealand’s economy nears technical recession

According to a recent poll of 13 economists, the aggressive hike of the cash rate by the Reserve Bank of New Zealand (RBNZ) is believed to have pushed the country into a technical recession in the first quarter. The poll indicates that the Gross Domestic Product (GDP) is expected to have contracted by 0.1% in the March quarter, falling short of the RBNZ’s forecast of 0.3% growth. This contraction would result in two consecutive quarters of negative growth, meeting the definition of a technical recession after a 0.6% contraction in the previous quarter.

The RBNZ, which recently raised rates by 25 basis points to 5.5%, the highest level in over 14 years, has indicated that it is done tightening. However, some economists believe that the boost to the economy from high migration and the return of tourism may prompt the central bank to take further action. Market expectations suggest a 50% chance of another 25 basis point hike by October. Jarrod Kerr, chief economist at Kiwibank, expressed a different view, stating that he expects the next cash rate move to be a cut.

The first-quarter economy was negatively impacted by the effects of Cyclone Gabrielle and the Auckland flash floods, which caused significant damage amounting to as much as NZ$14 billion ($8.6 billion). These events resulted in reduced farm production, a decline in tourism, and slower consumer spending. However, recent economic data has shown volatility, and some economists anticipate weak or flat growth rather than negative growth.

Brad Olsen, a principal economist at Infometrics, emphasised that the momentum of the economy will be crucial for the RBNZ, regardless of whether the growth is weakly positive or weakly negative.