GDP fell 0.6 pc in fourth quarter, worse than expected - expectations for interest rate hikes fall

The economy contracted 0.6 per cent in the December quarter, a bigger fall than expected, raising the likelihood New Zealand is already in a technical recession.

The worse-than-expected data, in combination with the fall-out from the global banking crisis, has prompted markets and economists to cut their expectations for rate hikes next month.

Nine of 16 industries experienced a decrease in activity compared with the September 2022 quarter.

Manufacturing was the biggest driver of the decrease, down 1.9 per cent.

“A fall in transport equipment, machinery, and equipment manufacturing corresponded to lower investment in plant, machinery, and equipment, while reduced output in food, beverage, and tobacco manufacturing was reflected in a drop in dairy and meat exports,” Ruvani Ratnayake of Stats NZ said.

Household spending was flat, as decreased spending on durables, including audiovisual equipment and furnishings, was offset by increased household spending on services.

The quarterly figure was substantially worse than major bank economists anticipated. Two consecutive quarters of negative growth is a widely-used measure of recession.

The New Zealand dollar and wholesale interest rates fell in the minutes following the GDP release.

By late morning, the Kiwi was down 20 pips at US61.66c while key two-year swap rates were down 7 basis points at 4.94 per cent.

ASB economists responded by cutting their interest rate call, now saying they expect the Reserve Bank to hike by just 25 basis points in April, rather than 50.

Capital Economics in Sydney said it expected the RBNZ will cut rates by year-end as the recession takes hold.

The GDP fall follows a rise of 1.7 per cent in the September 2022 quarter and takes annual GDP growth to 2.4 per cent over the year ended December 2022, compared with the year ended December 2021.

National finance spokesperson Nicola Willis noted that - excluding Covid-19 lockdowns - it was the weakest quarterly growth since the Global Financial Crisis.

“A stalling economy is yet more bad news for New Zealanders already battling sky-high inflation and rapidly rising interest rates,” she said.

But finance minister Grant Robertson argued that the economy had grown strongly in the two quarters before this result.

“While GDP is likely to move around a bit as we continue to recover from Covid, our economy is nearly 6.7 per cent bigger than before the start of the pandemic, ahead of most countries we compare ourselves with,” Robertson said.

Earlier, ASB had forecast a 0.5 per cent slump, saying an element of payback was likely following the “whopper” 2 per cent lift in the third quarter.

“GDP data is hugely backwards-looking at the best of times, but that’s doubly the case this time around given the impact of Auckland flooding and then Cyclone Gabrielle in January and February,” ASB senior economist Nathaniel Keall said earlier.

“Still, the print should provide a signal on the momentum (or lack thereof) the economy maintained heading into this year’s force majeure shocks.”

The release comes as the world braces for further fallout from the banking crisis in the US and Europe.

Both ANZ and Kiwibank had pencilled in a 0.3 per cent contraction for the quarter.

ANZ senior economist Miles Workman said weak data was likely an exaggerated “payback” for the large rebound in the third quarter.

“The economy is slowing – just perhaps not at the pace quarterly GDP growth in [the fourth quarter] may suggest.”

Kiwibank economists set the quarterly contraction into context across the entire second half of 2022.

“It’s largely payback from the surprisingly strong 2 per cent growth in Q3. But even with a weak print, growth over the second half was impressively strong,” said chief economist Jarrod Kerr.

“At 1.2 per cent, that’s well above the pre-Covid quarterly average of 0.7 per cent.”

Key measures of economic activity slowed into year-end, Kiwibank said.

“From building work to manufacturing sales and retail trade, the data point to weak activity.”