Grim verdict for NZ: No respite from downturn this year - global research group BMI

Economists' interest-rate outlooks are getting increasingly gloomy as market woes escalate. Photo / 123rf

New Zealanders shouldn’t expect any meaningful rebound from recession this year, according to a gloomy prognosis by international research agency BMI.

“After falling into technical recession in [the first quarter], real GDP growth is unlikely to have rebounded in [the second quarter],” said economists at BMI, a unit of Fitch Group.

Weaker global growth and a challenging domestic backdrop would take a toll on New Zealand’s economy in 2023, they said.

BMI has retained its view that real GDP growth will decelerate sharply in 2023, coming in at just 1 per cent.

The report noted the impact of higher interest rates and recessionary conditions in the private sector.

“New Zealand families remain highly leveraged and, consequently, susceptible to adverse effects from higher interest rates,” BMI said.

“At 94.5 per cent of GDP, the debt ratio of New Zealand households is a few percentage points higher than the developed market average of 73.3 per cent, indicating that New Zealand families are highly leveraged compared to their developed market counterparts.”

BMI - along with the consensus of local economists - doesn’t anticipate any interest rate cuts before 2024.

“We believe that financial conditions will remain restrictive in the upcoming months, carrying negative implications for household finances, consumption, and real GDP growth particularly in 2023.”

Meanwhile, figures for June showed activity in the private sector contracted for the first time since February 2022, adding to our bearish outlook on the economy.

The composite purchasing managers’ index (PMI) fell below the 50 mark that separates a sectorial expansion from a contraction in June, coming in at 49.8, the lowest reading since February 2022, BMI said.

“Both the services and the manufacturing PMIs eased in June, combining to pull the headline index down, with the manufacturing PMI falling further below 50 (47.4) and the services PMI hovering just above 50 (50.1).”

The manufacturing PMI fell further in July, to 46.3.

“This marked the fifth consecutive month of contraction in the manufacturing sector and the steepest since August 2021, when the country was last in a Covid-19 lockdown,” BMI said.

“As domestic demand weakens and monetary policy remains restrictive, we anticipate the private sector to face challenges throughout the remainder of the year, further impeding overall economic growth.”

Risks to our growth projections remained tilted toward the downside, BMI said.

“Our current forecast indicates the OCR to have reached its peak at 5.50 per cent. However, if inflation proves to be stickier on the upside, the RBNZ might respond with a more aggressive monetary policy setting, negatively affecting consumption and investment.”

It also warned that prolonged adverse weather conditions could further contract agricultural output and discourage tourists from visiting New Zealand, leading to a decline in overall exports of goods and services.