Double-dip recession ‘back in play’

Thursday, 14 December 2023

The economy may have entered a double-dip recession now that Stats NZ has reported a surprise drop in GDP in the September quarter, an economist has warned.

Economic activity fell 0.3% in the three months to the end of September despite booming migration, according to Stats NZ’s latest estimates.

Capital Economics economist Abhijit Surya said the decline reflected broad-based weakness in demand and it believes activity has remained weak in the current quarter as the impact of higher interest rates flows through the economy.

If GDP falls again in the December quarter, that would mark the second recession within a year, following the small 0.3% contraction that was spread over the six months to the end of March.

Finance Minister Nicola Willis said the September-quarter data confirmed what Kiwis “already know”, which was that the economy was under major strain.

“Overcoming these economic conditions won’t be easy. The Government will continue to take swift action to rebuild the economy in the interests of all New Zealanders,” she said.

The September drop in GDP dragged down the annual rate of growth in the economy to a lowly 1.3% and had not been expected by most economists.

The Reserve Bank and ANZ had both forecast that the country’s GDP would rise 0.3% during the quarter, while ASB and Kiwibank had predicted an 0.2% increase.

Bank of New Zealand had projected zero growth and Westpac was closest among the major banks in tipping a 0.1% decline.

Stats NZ estimates the country attracted a net 34,000 migrants during the quarter, and said that on a “per capita basis” GDP fell 0.9%.

Prior to the data being released, the New Zealand Institute of Economic Research reported that economists it polled expected the economy would grow at the tepid annual rate of 1.2% in both the year ending in March and the year after that.

A drop in GDP would usually be seen as likely to weaken interest rates, but the Reserve Bank is not scheduled to review the 5.5% official cash rate until February 28.

By then it will have more up-to-date information on unemployment and inflation for the December quarter.

Surya said Capital Economics expected the central bank would start cutting rates by September, much earlier than the bank had signalled.

If anything, the latest GDP data tilted the balance towards interest rates being loosened “even earlier”, he said.

ANZ said it raised the bar considerably for an interest-rate hike, but was not an obvious catalyst for a rate cut any time soon as “sticky inflation remains the big concern.”

Westpac senior economist Darren Gibbs said Thursday’s figures portrayed an economy that had been sliding backwards.

After taking account of revisions by Stats NZ of GDP in earlier quarters, the overall size of the economy in the September quarter was “a whopping 1.8% smaller” than the Reserve Bank had estimated in November, he said.