Will a GDP slump change the rate path for Reserve Bank Governor Adrian Orr? Photo / Mark Mitchell
Will a GDP slump change the rate path for Reserve Bank Governor Adrian Orr? Photo / Mark Mitchell
First the bad news: the economy has tanked. Now the good news: the economy has tanked.
Fears that the economy might keep running hot, requiring much higher Reserve Bank rate hikes, were blown out of the water by a worse-than-expected GDP contraction in the last quarter of 2022.
The economyshrank 0.6 per cent in the December quarter. Manufacturing was the biggest driver of the decrease, down 1.9 per cent.
Household spending was flat, as decreased spending on durables, including audiovisual equipment and furnishings, was offset by increased household spending on services.
The news, coming as it did on another morning of global financial market panic, had the market and some economists dialling back expectations for official cash rate hikes.
The quarterly GDP figure was substantially worse than the market and major bank economists anticipated. The market consensus was for a 0.2 per cent contraction.
“Crucially, [the data] was much weaker than the RBNZ’s February forecast for a rise of 0.7 per cent,” said Abhijit Surya of Sydney-based Capital Economics.
“The RBNZ had expected a peak-to-trough fall in GDP of 1.1 per cent this year, with the recession starting only in Q2. However, the latest data already render the RBNZ’s forecast moot and reinforces our view that the bank will start cutting rates by year-end.
“The full impact of last year’s rate hikes on dwellings investment has yet to be felt. All told, we expect real GDP to fall through at least the first half of the year.”
While the timing of a recession remained highly uncertain, conditions were “already recessionary for the manufacturing and the retail trade & accommodation sectors,” said ASB economist Nathaniel Keall. “New Zealand manufacturing output has now fallen for four consecutive quarters, often by quite chunky margins.”
“We tweaked our OCR view and now expect a 25bp OCR hike in April but have stuck with a 5.25 per cent OCR peak,” he said.
Market rates also fell after the GDP release, suggesting a lower peak for the OCR - although the weight of the global banking fears no doubt added downward pressure.
Two-year swap rates were down by 7 basis points at 4.94 per cent.
Westpac pulled back its forecast, putting it in line with market expectations.
“We’ve revised our OCR forecast down to a peak of 5 per cent (from 5.50 per cent previously),” said acting chief economist Michael Gordon.
“That implies only one more 25-basis-point increase left in this cycle, which we still think will be delivered at the April OCR review.”
With the economy now coming from a much less overheated starting point than the Reserve Bank was expecting, the degree of slowing needed to bring inflation under control was also less than previously thought, he said.
But others were unmoved by the slump - sticking to existing forecasts and the view that the data was still being distorted by Covid effects.
The result did represent “a major starting point shock” for the RBNZ - in the order of 1.8 per cent, said BNZ senior economist Craig Ebert.
“All other things being equal, this would push the Reserve Bank towards a softer stance than it was otherwise contemplating,” he said.
“But all things aren’t equal. If inflation and employment indicators remain excessively tight, the RBNZ will stick to its knitting and push ahead with further rate increases.”
ANZ expressed scepticism about the extent to which the data provided any real direction.
“We didn’t take the full signal from Q3′s whopper (1.7 per q/q growth) and we’re not taking the full signal from Q4′s payback either,” said ANZ senior economist Miles Workman.
“That’s not to say economic momentum isn’t slowing – it most certainly is – but rather, Q4 quarterly growth overstates the pace of the slowdown.
“Downside surprises on the activity data are unlikely to move the dial for the OCR until they are accompanied by clear evidence that the current extreme mismatch between labour supply and labour demand has turned a corner (and the noise ceases to reverberate).”
Kiwibank also questioned assumptions about a technical recession (defined as two quarterly contractions in activity, and usually a lift in unemployment).
“It’s too early to say whether the Cyclone-impacted March quarter will result in growth or another contraction,” said Kiwibank chief economist Jarrod Kerr.
“The impacts of the flooding and cyclone on economic activity are two-sided. First, there is a very painful contraction in activity during the events, as households are displaced, and businesses are forced to shut. And then there’s the clean-up and rebuild.”
Flooding after the Ngaruroro River in Hawke's Bay burst its banks during Cyclone Gabrielle. Photo / Supplied
“The clean-up and rebuild (or relocate) will induce a burst of activity that will persist for many quarters and years in parts. It’s also likely to be inflationary as we’re operating with limited spare capacity (worker shortages) and we may find ourselves with shortages in key materials.”
Moodies Analytics noted that the fourth quarter slump was exacerbated by cold weather reducing milk production in October.
“It is a little more complex than saying a recession is under way,” said Illiana Jain, associate economist.
The big fall was a function of falling government spending, flagging exports and weaker investment, she said.
The drop in exports was led by tumbling shipments of dairy and meat.
“In the case of dairy, prices and volumes were under pressure. The Global Dairy Trade Price Index fell in the final quarter of 2022. Reports from Fonterra suggest that cold weather in October hit milk production.”
By contrast, services exports were strong last quarter, she said.
“With Chinese tourists expected to return through 2023, services exports will be a bright spot in this year’s GDP figures.”
