New Zealand’s economy has officially entered a recession, marking a sharp contraction in the third quarter of 2024, according to recently released data. This downturn, far worse than expected, raises concerns about the country’s economic resilience and puts further pressure on the Reserve Bank of New Zealand (RBNZ) to consider more aggressive monetary policy easing.
The country’s gross domestic product (GDP) declined by 1.0% in the September quarter, significantly outpacing market forecasts of a 0.2% drop. This followed a revised 1.1% contraction in the June quarter, meeting the technical definition of a recession—two consecutive quarters of negative growth. Excluding the pandemic, this represents the largest two-quarter decline since the 1991 recession, highlighting the depth of the current economic woes.
Broader Economic Impact
The recession’s ripple effects are evident across various sectors, with significant declines in manufacturing, utilities, and construction. Consumer and government spending also contracted, exacerbating the economic slowdown. On an annual basis, GDP fell by 1.5% through September, the steepest annual drop since the COVID-19 pandemic.
Adding to the grim picture, New Zealand’s population grew by 1.2% to 5.35 million over the same period, resulting in an even sharper 2.1% decline in GDP per capita. These figures underline the scale of economic challenges facing policymakers and the broader economy.
Finance Minister Nicola Willis pointed to the RBNZ’s actions as a contributing factor to the downturn, noting that high inflation led to tighter monetary policies that stifled growth. “The decline reflects the impact of high inflation on the economy,” she said. “The Reserve Bank’s engineered recession has significantly hampered economic recovery.”
Pressure on Monetary Policy
The bleak data has intensified calls for further rate cuts from the RBNZ, which has already reduced rates by 125 basis points this year, bringing the official cash rate to 4.25%. Financial markets now suggest a 70% probability of a 50-basis-point cut in February 2025, with further reductions expected, potentially bringing rates down to 3.0% by the year’s end.
Abhijit Surya, an economist at Capital Economics, believes the deteriorating economic conditions could push the RBNZ towards an even larger rate cut of 75 basis points. “Given the dire state of the economy, we’re more convinced than ever that rates will need to fall below neutral, possibly to 2.25%,” he said.
The central bank’s latest projections had underestimated the severity of the downturn, predicting only a 0.2% contraction for the September quarter. These miscalculations have raised questions about the effectiveness of the RBNZ’s forecasting models and policy responses.
Government Budget Constraints
The recession has also forced the government to revise its fiscal outlook. New Zealand’s Treasury recently abandoned its expectations of a return to budget surpluses, forecasting deficits for the next five years. This fiscal strain limits the government’s ability to implement expansionary policies to stimulate growth, leaving the central bank as the primary driver of economic recovery.
Signs of a Possible Recovery?
Despite the grim statistics, some indicators suggest the worst of the downturn may be over. A recent ANZ business confidence survey showed a modest recovery in activity, with December marking the first significant improvement in past activity metrics. Sharon Zollner, ANZ’s head of New Zealand economics, noted, “The bar for economic improvement is currently very low, but these signs of recovery provide a glimmer of hope.”
Additionally, revisions from the statistics bureau revealed that GDP growth for the fiscal years leading up to March 2024 was stronger than previously thought, erasing earlier reports of a recession during that period. These adjustments may signal a more resilient economic base than initially assumed, offering some optimism for a gradual rebound.
Global and Domestic Challenges
New Zealand’s economic challenges are not occurring in isolation. The recession coincides with global economic uncertainty, driven by factors such as volatile commodity prices, geopolitical tensions, and slowing growth in major economies. Locally, the economy continues to grapple with inflationary pressures, which remain stubbornly high despite recent monetary easing.
The New Zealand dollar has also borne the brunt of the economic turmoil, falling to a two-year low of $0.5614 against the U.S. dollar. The currency’s weakness reflects both the domestic downturn and the relative strength of the U.S. economy, which has been buoyed by hawkish policies from the Federal Reserve.
Looking Ahead
The road to recovery for New Zealand will likely depend on a combination of targeted fiscal measures and monetary easing. While the RBNZ faces growing pressure to implement steeper rate cuts, the government must address structural issues to foster long-term growth. Policymakers will also need to navigate a delicate balance between curbing inflation and supporting economic recovery, particularly as external risks continue to pose significant challenges.
In the short term, the focus remains on stabilizing the economy and restoring consumer and business confidence. However, achieving sustained growth will require coordinated efforts to address underlying vulnerabilities and adapt to an evolving global economic landscape.
As New Zealand moves forward, its ability to weather these challenges will not only define its immediate recovery but also shape its economic trajectory in the years to come.
(Source:www.cnbc.com)
The country’s gross domestic product (GDP) declined by 1.0% in the September quarter, significantly outpacing market forecasts of a 0.2% drop. This followed a revised 1.1% contraction in the June quarter, meeting the technical definition of a recession—two consecutive quarters of negative growth. Excluding the pandemic, this represents the largest two-quarter decline since the 1991 recession, highlighting the depth of the current economic woes.
Broader Economic Impact
The recession’s ripple effects are evident across various sectors, with significant declines in manufacturing, utilities, and construction. Consumer and government spending also contracted, exacerbating the economic slowdown. On an annual basis, GDP fell by 1.5% through September, the steepest annual drop since the COVID-19 pandemic.
Adding to the grim picture, New Zealand’s population grew by 1.2% to 5.35 million over the same period, resulting in an even sharper 2.1% decline in GDP per capita. These figures underline the scale of economic challenges facing policymakers and the broader economy.
Finance Minister Nicola Willis pointed to the RBNZ’s actions as a contributing factor to the downturn, noting that high inflation led to tighter monetary policies that stifled growth. “The decline reflects the impact of high inflation on the economy,” she said. “The Reserve Bank’s engineered recession has significantly hampered economic recovery.”
Pressure on Monetary Policy
The bleak data has intensified calls for further rate cuts from the RBNZ, which has already reduced rates by 125 basis points this year, bringing the official cash rate to 4.25%. Financial markets now suggest a 70% probability of a 50-basis-point cut in February 2025, with further reductions expected, potentially bringing rates down to 3.0% by the year’s end.
Abhijit Surya, an economist at Capital Economics, believes the deteriorating economic conditions could push the RBNZ towards an even larger rate cut of 75 basis points. “Given the dire state of the economy, we’re more convinced than ever that rates will need to fall below neutral, possibly to 2.25%,” he said.
The central bank’s latest projections had underestimated the severity of the downturn, predicting only a 0.2% contraction for the September quarter. These miscalculations have raised questions about the effectiveness of the RBNZ’s forecasting models and policy responses.
Government Budget Constraints
The recession has also forced the government to revise its fiscal outlook. New Zealand’s Treasury recently abandoned its expectations of a return to budget surpluses, forecasting deficits for the next five years. This fiscal strain limits the government’s ability to implement expansionary policies to stimulate growth, leaving the central bank as the primary driver of economic recovery.
Signs of a Possible Recovery?
Despite the grim statistics, some indicators suggest the worst of the downturn may be over. A recent ANZ business confidence survey showed a modest recovery in activity, with December marking the first significant improvement in past activity metrics. Sharon Zollner, ANZ’s head of New Zealand economics, noted, “The bar for economic improvement is currently very low, but these signs of recovery provide a glimmer of hope.”
Additionally, revisions from the statistics bureau revealed that GDP growth for the fiscal years leading up to March 2024 was stronger than previously thought, erasing earlier reports of a recession during that period. These adjustments may signal a more resilient economic base than initially assumed, offering some optimism for a gradual rebound.
Global and Domestic Challenges
New Zealand’s economic challenges are not occurring in isolation. The recession coincides with global economic uncertainty, driven by factors such as volatile commodity prices, geopolitical tensions, and slowing growth in major economies. Locally, the economy continues to grapple with inflationary pressures, which remain stubbornly high despite recent monetary easing.
The New Zealand dollar has also borne the brunt of the economic turmoil, falling to a two-year low of $0.5614 against the U.S. dollar. The currency’s weakness reflects both the domestic downturn and the relative strength of the U.S. economy, which has been buoyed by hawkish policies from the Federal Reserve.
Looking Ahead
The road to recovery for New Zealand will likely depend on a combination of targeted fiscal measures and monetary easing. While the RBNZ faces growing pressure to implement steeper rate cuts, the government must address structural issues to foster long-term growth. Policymakers will also need to navigate a delicate balance between curbing inflation and supporting economic recovery, particularly as external risks continue to pose significant challenges.
In the short term, the focus remains on stabilizing the economy and restoring consumer and business confidence. However, achieving sustained growth will require coordinated efforts to address underlying vulnerabilities and adapt to an evolving global economic landscape.
As New Zealand moves forward, its ability to weather these challenges will not only define its immediate recovery but also shape its economic trajectory in the years to come.
(Source:www.cnbc.com)
