Economy experiences sharpest decline in more than 30 years
Thursday, 19 December 2024
New Zealand’s GDP contracted 1% in September quarter.
The economy was in “extremely poor health” during middle of 2024.
Further interest rate cuts anticipated in 2025 to support economic recovery.
The economy is “winding back the clock,” one economist says, as it moves into a technical recession.
The Gross Domestic Product (GDP) - a measure of economic activity - dropped 1% in the September quarter, which was more than doubled what economists were predicting.
It followed a 1.1% decline in the June quarter (revised down from -0.2%).
Kiwibank senior economist Mary Jo Vergara said the economy was “winding back the clock,” recording the weakest six month period since 1991, excluding during the Covid-19 pandemic.
“Compared to the RBNZ’s and market consensus of another -0.2% contraction, or a -0.3% contraction that we had expected to see, the 1% fall in the economy may seem to set off immediate alarm bells. But reader beware the larger falls have still not changed the overall end size of the economy,” she said.
There was light at the end of the tunnel, though, as the September quarter should mark the final quarter of the economy in decline for this cycle.
“The additional 100bps of cuts that took place over the December quarter should provide some relief to the Kiwi economy in the current quarter. And with further cuts to come, 2025 should be a much better year.”
Westpac senior economist Michael Gordon said it was the sharpest two quarter decline in more than 30 years.
The September quarter decline covered a wide range of sectors, including construction down 2.8% and electricity down 3.7%.
“The recent downturn in activity at least validates the RBNZ’s decision to start cutting interest rates earlier this year,” he said.
“Our early assessment is that this is still likely to be the worst of it for GDP. The high-frequency data has been turning higher in recent months, and there are some aspects of the Q3 weakness, such as in electricity generation, that we know won’t be repeated.”
ASB senior economist Kim Mundy said the data highlighted that the NZ economy was in “extremely poor health” during the middle of the year.
“And the data reinforce that it was vital that the RBNZ started to take its foot off the brake.
“For the RBNZ, today’s GDP print doesn’t significantly alter the picture. The economy was very weak in the middle of 2024, as to be expected after a prolonged period of restrictive monetary policy.”
Further OCR cuts should help with economic growth and limit the risk of prolonged damage, however, ongoing headwinds, including the weakening labour market and cooling net migration inflows, suggested there would be no rapid turnaround in the economy, she said.
“We expect a more pronounced recovery will become evident as we progress through 2025, with interest-rate sensitive sectors the first ones likely to show signs of life.”