GDP preview: ‘Rolling maul recession’ as economy contracts again

Economic conditions have been described as a rolling-maul recession. Photo / Getty Images

The economy is likely to have contracted in the second quarter as high interest rates took their toll on consumption, economists say.

After a bounce-back into growth territory in the March quarter, that won’t be enough to meet the technical definition for another recession. But it might as well be.

“Next Thursday’s GDP release is likely to show a continuation of the New Zealand economy’s ‘rolling maul’ recession, where one-quarter of flat or slightly negative growth has merged seamlessly into another,” said Westpac senior economist Michael Gordon.

“Following the insipid (though better than expected) 0.2% rise in GDP in the March quarter, we expect to see a 0.4% fall for the June quarter. The overall picture remains soft though, with most sectors expected to record declines for the quarter, and consumer spending remaining particularly weak as they continue to grapple with high interest rates and the rising cost of living.”

Kiwibank economists struck a similar tone, also forecasting a 0.4% fall and suggesting the country was on its way to a “triple-dip recession”.

“The Kiwi economy is starting to sound like a (very sad) assortment of ice-cream flavours. Double dip, triple trough, or more like ‘Rocky Road’. Officially we may record three dips. But for households and businesses, it has been two years of unrelenting recession,” they wrote.

The Reserve Bank (RBNZ) has already forecast that the country is in recession again with negative growth in the current third quarter, but Westpac’s Gordon saw some signs of growth returning.

“Our forecast is now slightly stronger than the -0.5% that the Reserve Bank expected [for the second quarter] in its August Monetary Policy Statement, though if our forecast proves correct, it’s unlikely that it would influence the RBNZ’s thinking much,” Gordon said.

“In its decision to start cutting the OCR [Official Cash Rate] much sooner than previously signalled, the RBNZ cited a range of high-frequency activity indicators that had lurched sharply lower in the June month.”

While those June results all but ensured a weak GDP outturn for the second quarter as a whole, that weakness didn’t appear to have carried through into July and August,” he said.

“With the risk of a sharper-than-expected downturn now fading, we think the RBNZ will return its focus to the inflation data to determine how far or fast it will be able to reduce interest rates.”

ANZ economist Henry Russell noted that “more than usual” Thursday’s data would feel like ancient history given the RBNZ had now kicked off OCR cuts, and the focus had shifted to how responsive the economy would be to lower interest rates.

“Nonetheless, the [the second quarter] data will be important for gauging how much of an impact past monetary tightening has had on the real economy,” he said.

“After all, it was a meaningful deterioration in high-frequency activity indicators that drove the RBNZ to bring forward OCR cuts by 12 months. Now we’ll get to see if the ‘low-frequency’ data followed suit.”

ANZ has the most upbeat forecast for the GDP data picking just a 0.1% contraction.

“While our forecast is well above the RBNZ’s August MPS forecast, it’s certainly not strong in any sense of the word,” Russell said.

“There was plenty of uncertainty surrounding the forecast.

Regardless, he didn’t expect the GDP data to be a game-changer for the monetary policy outlook.

“Even in the case of an upward surprise, economic momentum is likely to still be soft enough to be consistent with rising spare capacity and falling inflation. On the other side, a material downward surprise would need to be weighed against a rapidly shifting outlook now that interest rates are falling.”

Looking forward, ASB economist Kim Mindy also noted that early indicators suggested that parts of the economy had fared better in the third quarter.

“We still expect the RBNZ to cut the OCR a further two times this year, and for the OCR to settle at 3.25% by the end of 2025,” she said.

“However, a contraction in GDP that is less than the RBNZ’s -0.5% pick could see market pricing for OCR cuts unwind slightly. Markets are pricing almost a 50% chance of a 50bp rate cut in October with over 80bp priced in total for the remainder of 2024. This has always been on the rich side in our view.”

ASB is forecasting a fall of 0.3% for the second quarter.

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here.