New Zealand has fallen into a deep recession

Thursday, 19 December 2024

The economy has fallen into a deep recession, but the overall picture is not as bad as it appears, economists say.

New Zealand economic activity has fallen again, down 1% in the three months to the end of September. It’s been the weakest six months since 1991.

That followed a 1.1% decline in the June quarter, revised down from 0.2%.

The market had anticipated a quarterly fall of 0.2%.

Manufacturing and construction reported negative growth compared to the previous quarter, according to Stats NZ.

Activity declined in 11 of the 16 industries measured, with the largest falls in manufacturing, business services and construction.

Goods-producing and service industries fell, while primary industries increased.

Industries that rose included rental, hiring, and real estate services and agriculture.

'This rise in agriculture was driven by dairy farming. We also saw a rise in exports of milk powder, butter and cheese,' Stats NZ macroeconomics growth spokesperson Jason Attewell said.

GDP per capita fell 1.2% during the September quarter. This was the eighth consecutive fall.

Household consumption expenditure fell 0.3% in the quarter, driven by a fall in household essentials such as grocery food and electricity. Spending increased on durable goods such as motor vehicles and audio-visual equipment and phones.

Kiwibank economist Sabrina Delgado said compared to the Reserve Bank’s and market consensus of another 0.2% contraction, or a 0.3% contraction expected, the 1% fall in the economy may seem to set off immediate alarm bells.

But the larger falls had still not changed the overall end size of the economy, Delgado said.

“Methodological changes from Stats NZ in their GDP calculation have seen historical prints revised upwards over a longer period in previous quarters. Which has now balanced out the bigger falls in the June and September 2024 quarters seen today,” she said.

“Essentially, the end point of the economy is not too different from what was originally published in June. But the path in getting there has changed.

“The economy has been stronger than originally thought in the earlier parts of the past year. And instead, we are now facing much sharper declines. It's a snowball effect.”

Overall, the actual size of the economy was still 0.4% larger than what was published for the June quarter off the back of the higher revisions prior to Q2.

The past six months have been the weakest six month period since June 1991.

“At the same time things on a per capita basis are still deteriorating despite a significant cooling in net migration. On a per person basis, GDP contracted 1.2%. While on an annual basis the per capita size of the economy is 2.7% smaller,” Delgado said.

The was light at the end of the tunnel she said. “The September quarter should mark the final quarter of the economy in decline for this cycle.”

The 100-basis point cuts to the official cash rate over the December quarter should provide some relief to the economy, she said.

“And with further cuts to come, 2025 should be a much better year. High interest rates have hurt, and the economy demands more easing. We expect another 125bps of rate cuts to come, to return policy settings to more neutral levels.”

ASB senior economist Kim Mundy said while the economy was in extremely poor health during the middle of the year, for the Reserve Bank today’s GDP result “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 to spur economic growth and limit the risk of doing prolonged damage.

But headwinds including a further weakening in the labour market, and cooling net migration inflows “suggests we are unlikely to see a rapid turnaround in the economy”.

“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,” Mundy said.