Gloomy data points the way on the path to lower inflation. Photo / Getty Images
Gloomy data points the way on the path to lower inflation. Photo / Getty Images
Through all the grim GDP data, there are signs that monetary policy is working - and that might mean better odds on Official Cash Rate cuts this year.
Gross domestic product (GDP) fell 0.1 per cent in the December 2023 quarter, compared with the September quarter which also fell 0.3per cent.
In the end, the arrival of a “technical” recession didn’t mean that much. There’s no question that the economic environment has felt recessionary for the past year.
It was the fourth quarter in the past five where the economy has contracted, ASB economist Nathaniel Keall said. Annual growth was just 0.6 per cent.
And looked at on a per capita basis, it all gets very ugly. Per capita GDP was down 0.7 per cent for the quarter.
“Surging migration-led population growth means the economy at the individual household level is much weaker than headline GDP suggests,” said ANZ senior economist Miles Workman. “Having contracted for five consecutive quarters (to be down 3.9 per cent peak to trough), the per capita data makes for grim reading.”
KiwiBank chief economist Jarrod Kerr highlighted the double dip nature of the recession - after the shallow two-quarter dip in late 2022 and early 2023.
“The heavy hand of the Reserve Bank [RBNZ] has hurt households and businesses,” Kerr said. “Restrictive monetary policy is clearly working. In fact, more than they had expected. The RBNZ expected a flat print, just narrowly averting a recession.”
That might point to some “light at the end of the tunnel”, he suggested.
“Yes, there is light at the end of the tunnel, but only when the RBNZ takes their foot off the brake. Today’s numbers support our call for RBNZ rate cuts to commence in November.”
The good news was the worst should be over, Kerr said.
“Though we still expect 2024 to be a year of low growth so long as high interest rates remain... But the turning point is on the horizon. 2024 may not be the year of growth but it is the year of central bank rate cutting.”
Offshore central banks like the US Federal Reserve were likely to beat us to it but their move to lower rates would help boost global demand and in turn, feed through on to our export volumes.
“Here at home, it shouldn’t be too much longer before the RBNZ can cut rates themselves.”
At ANZ, where economists have had a more hawkish view on interest rates, senior economist Miles Workman made the conciliatory point that this recession was at least more of a controlled burn-off than a wildfire.
“New Zealand was in a technical recession at the end of 2023, but this isn’t your run-of-the-mill, run-for-the-hills recession that we’ve seen through times of financial market and economic crisis,” he said.
“Rather, it’s a policy-induced slowdown that’s part of the necessary transition from too much fiscal and monetary stimulus in the wake of the pandemic.”
The RBNZ’s “least regrets” macro stimulus was appropriate at the time, but that didn’t mean it came without costs, he said.
“This is what paying the piper looks like, and if we don’t pay up, the inflation rats will take over the whole economy.”
ANZ senior economist Miles Workman.
Looking forward, ANZ expects the slowdown to find a floor around mid-2024, “at which point the million-dollar question will be whether the slowdown has been enough to return CPI inflation sustainably to target.”
“There’s still no guarantee that inflation will slow as quickly as the RBNZ hopes,” he said.
But ASB’s Keall was more optimistic.
“For the RBNZ, the downward surprise for GDP tilts the balance in favour of OCR cuts coming sooner than the mid-2025 timeframe flagged in the February Monetary Policy Statement,” he said.
“We continue to expect OCR cuts from the second half of 2024.We caution that the weak growth over the past 18 months has still coincided with relatively high inflation and the supply side capacity of the economy will remain hugely material in how quickly inflation will fall from here.”
While expressing concern at the current state of the economy, Finance Minister Nicola Willis also highlighted some positives.
Meanwhile, Finance Minister Nicola Willis expressed concern at the news.
“It is concerning that we are in recession even despite our rapidly growing population. This simply reinforces that our approach to strengthening and growing the economy is the right one,” she said.
“The good news is that inflation is tracking in the right direction. Last week we saw the price of fresh fruit and produce drop by 9.3 per cent, which certainly helps Kiwi families who have been pulling in their belts across the board.”
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.
