GDP shocker: How badly is NZ’s economy really doing?

New Zealand’s shrinking economy in the third quarter and the likelihood of recession have caused some alarm and sparked a blame game.

Finance Minister Nicola Willis said she’d inherited a “toxic trifecta” of high interest rates, lingering high inflation and the job and business insecurity of a recession.

Matthew Hooton argued New Zealand was the worst-performing economy in the developed world, with GDP falling despite blisteringly quick population growth.

Earlier this year, some pundits even said New Zealand was likely to be the worst economy in the world apart from Equatorial Guinea.

The Equatoguinean economy had seven consecutive years of recession until 2022, according to the World Bank.

Equatorial Guinea is a small former Spanish colony wedged between Cameroon and Gabon, ranked 171st out of 180 countries in Transparency International’s corruption perceptions index.

Stats NZ said New Zealand’s economy shrank 0.3 per cent in the three months ending September 30.

Per capita, there was an even smaller slice of the pie to go round, with GDP per person shrinking 0.9 per cent.

ANZ chief economist Sharon Zollner said it was an unpleasant surprise, and well off what most bank economists predicted.

“The GDP numbers were a shock,” Zollner said today. “The per capita story is dire, taking those numbers at face value.”

But the economy might be cooling down after unsustainable growth earlier in the Covid-19 era.

“The IMF estimated New Zealand was the most overheated economy in the world last year by quite some margin.”

The country spent $30.6 billion more on imports than it earned from its exports in the year to September.

“People were spending well beyond their means, as you can see in the current account deficit and the fiscal deficit,” Zollner said.

For the year to June 30, Crown accounts showed an Obegal (operating balance before gains and losses) deficit of $9.4 billion, which was $2.5b more than forecast in May’s budget.

“The Government has borrowed a lot of money. Household debt hasn’t increased that much,” Zollner said.

Did that indicate Kiwi consumers were behaving sensibly, saving instead of carelessly racking up debt?

“Given our house prices went up 46 per cent in two years I’m not sure ‘sensible’ is a word I’d use without some qualification,” Zollner added.

“People with large mortgages are doing it quite tough.”

Inflation battle

Reserve Bank governor Adrian Orr’s responses to inflation, aggressively ratcheting up interest rates, earned the country attention from global markets which saw New Zealand as a guinea pig.

“There were a lot of people wishing us ill,” Zollner joked.

Some overseas observers scared of high interest rates might have hoped Orr failed to tame inflation, thereby reducing the chances other central bank governors would emulate Orr’s aggression.

Reserve Bank Governor Adrian Orr jacked up the official cash rate to combat inflation. Photo / Mark Mitchell, Herald montage

But in the US, the Federal Reserve also raised rates and took the fight to inflation, and the economy there is humming, up 1.3 per cent in the September quarter.

Migration was touted by many as a necessary response to painful New Zealand labour shortages, which emerged in mid-2022, and to the brain drain.

“We have imported a phenomenal number of workers at a time when the economy turns out to have been slowing markedly. So that is a pretty unusual situation,” Zollner said.

Migration may not have been enough to stop a third-quarter contraction but depending on your perspective, the economy would have been even worse without migrants, and it can take a long time for migrants to impact GDP.

Stats NZ data had already shown retail spending fell sharply in September, with clothes and apparel sales especially depressed.

And in October, spending in retail industries slid 0.7 per cent compared with September.

Despite everything said of the latest GDP stats, the third quarter numbers might not be right.

Stats NZ frequently revises data as existing methods or data sources are updated, or value-added data for selected industries changes.

”We’re still ricocheting around a little bit,” Zollner said. “That’s why we’re still seeing bigger revisions. It’s ultimately possible that the number will be revised again.”

There was more timely economic news today.

BNZ said the manufacturing sector improved in November - but the sector overall was still shrinking.

The Performance of Manufacturing Index (PMI) in November was at 47.6, below the breakeven level of 50.

The wood and paper products sector was pitiful at 39.2, metal products were just over the line at 50.2 but printing, publishing and recorded media were doing well, at 59.7.

“A general lack of demand and sales was the overriding theme mentioned by many manufacturers,” BNZ added.

The overall outlook in the manufacturing stats was poor, with BNZ lamenting a lack of Christmas cheer.

John Weekes is online business editor. He has covered courts, politics, crime and consumer affairs. He rejoined the Herald in 2020, previously working at Stuff and News Regional, Australia.