NZ in recession: Proof Reserve Bank 'did too much', economist says

Thursday, 15 June 2023

Two consecutive quarters of economic decline is considered to mean a country has suffered a recession.

A drop in GDP in the March quarter means New Zealand’s economy was in a technical recession at the start of the year – and economists warn the downturn may continue for some months to come.

The 0.1% drop reported by Stats NZ on Thursday was a second consecutive quarter of economic decline, after a 0.7% drop in the last three months of 2022.

Stats NZ revised up the scale of economic decline for the December quarter, having previously calculated the economy contracted by 0.6% in the last three months of last year.

Half the sectors tracked by Stats NZ saw declines in economic activity in the first three months of the year, led down by business services including advertising and management consulting.

New Zealand's first quarter decline compared to with modest economic growth in the country's major trading partners. Australia recorded GDP growth of 0.2%. Japan was up 0.7%. Even the United Kingdom managed 0.1% growth, although Stats NZ warned that the methodology used to calculate GDP varied from country to country.

Cyclones Hale and Gabrielle, and strikes by teachers all dragged on economic activity.

High inflation, included a sharp rise in food prices, drove an increase in household consumption spending.

GDP is the last piece of New Zealand's economic puzzle every quarter.

The construction, telecoms and finance sectors experienced lifts in economic activity.

Finance Minister Grant Robertson said the economy was still showing resilience.

“The result was not a surprise. We know 2023 is a challenging year as global growth slows, inflation has stayed higher for longer and the impacts of North Island weather events continue to disrupt households and businesses,” he said.

“Today's outcome fits the definition of a technical recession by the barest of margins. But the resilience of the New Zealand economy, including historically low unemployment, means it will not have the impact that would normally be associated with this term.'

But National’s finance spokesperson, Nicola Willis, said the economy was now “incredibly fragile”.

“Excessive inflation, high interest rates, a severe balance of payments deficit and now recession: this is a dangerous combination that threatens New Zealanders’ livelihoods.

“While the Government continues to make excuses, the data does not lie: New Zealand is now in worse shape than many of the countries we compare ourselves with including Australia, Canada and the US, all of which have faced similar global challenges but none of which face the toxic economic predicament we now find ourselves in.

Westpac economist Michael Gordon said the 0.1% fall in GDP was the average of the forecasts made by economists.

Sharon Zollner says prices are too high but that doesn’t mean they can’t rise.

However, it was lower than the 0.3% GDP expansion forecast by the Reserve Bank, which he said indicated that unless there were any surprises, the central bank would be content to hold its official cash rate (OCR) steady for the next three months.

“They will feel like they have done enough for now,” Gordon said.

Kiwibank economists said they expected the brunt of the slowdown was yet to come and there would be more contractions over the year ahead.

Chief economist Jarrod Kerr said the recession was a sign that the Reserve Bank had done too much in its attempt to slow inflation.

“We’re starting from a weaker position. It’s something we had flagged as a risk last year. We were concerned the economy was turning and I think the economy’s turned faster than we were expecting.”

He said his team had been vocal in its commentary around the Reserve Bank doing too much if the official cash rate went above 5%. “We stick by that view. We’re starting from a much weaker position, the economy is smaller than all of us thought it would be. The worst is yet to come unfortunately. The rate rises that they delivered last year and this year will take up to two years to feed through to the economy.”

Kiwibank chief economist Jarrod Kerr says worse is still to come.

ASB economists said the downturn would have looked worse if there had not been a surge in migration.

“On a per capita basis, New Zealand has now experienced two quarters where the contraction has been quite a bit steeper – down 1.1% last quarter and 0.7% this quarter. On the basis of disposable income per capita, we are looking at declines of 2.2% and 0.9% over the last two quarters. Given it is ultimately the standard of living of each New Zealander that matters, these are key figures to keep an eye on.”

They expected growth to remain “anaemic” over the next 12 months.

ANZ economist Sharon Zollner had been forecasting 0.2% GDP growth for the March quarter.

She said the Reserve Bank would be comfortable with the data.

“This is very much what they need to be seeing. If it weren't for the cyclone GDP probably would have been positive… if anything it will make them more comfortable with their plan which is to sit and wait ands ee how things pan out. It’s a slightly weaker starting point than they expected but there’s still that fiscal stimulus and much stronger immigration - they've taken a stance that that’s not going to be a problem but we’re still all waiting to see on that one.”

The Reserve Bank Te Pūtea Matua forecast 0.3% GDP growth for the March quarter in its May Monetary Policy Statement, and for the economy to contract modestly after.

“Annual GDP growth is projected to be flat at 0.0%in the year to the December 2023 quarter,” the Reserve Bank said at the time.

But it also noted factors that would make households feel like they were living through tough economic times.