NZ's already tepid economic growth heading for a nose dive

The economy was struggling even before the coronavirus outbreak. Photo / 123RF

New Zealand's economy was already slowing in the final quarter of last year and economists warn a sharp contraction is on the horizon as they call for the Reserve Bank to act.

Gross domestic product expanded 0.5 per cent in the December quarter, bringing annual growth to 1.8 per cent, slowing from a 2.3 per cent pace in the prior quarter.

"The decline in GDP growth in New Zealand in the fourth quarter shows that the economy was struggling even before the Covid-19 outbreak, which will surely drag the New Zealand economy into recession in the first half of 2020," said Capital Economics New Zealand and Australia economist Ben Udy.

Infometrics economist Gareth Kiernan said the economy's "stuttering performance throughout much of 2019 continued into the final quarter of the year."

Not only that, but growth in the December period was led by a 0.6 per cent expansion in service industries, something that doesn't bode well given services will likely be the hardest hit by the rapidly spreading virus.

Udy said the near-total loss of international tourism will be a 4 percentage point drag on headline GDP growth via reduced exports and social distancing will weigh on consumption.

The "Covid-19 outbreak over the early months of 2020 has reshaped the NZ and global economic outlook," said ASB Bank economist Jane Turner.

While the central bank and the government are stepping in, "the next step for the RBNZ would be quantitative easing via the purchase of NZ government bonds – and given the sharp increase in global government bond yields in recent days, this may now need to be done with some urgency," said Turner.

The central bank slashed the official cash rate 75 basis points to 0.25 per cent last week said any further easing will come via other tools, specifically large scale asset purchases of New Zealand government bonds. It didn't give a timeframe.

Turner is tipping the economy will shrink by 3-to-3.5 per cent over 2020, with the risks skewed to an even greater contraction.

ANZ Bank said its "best guess" is the economy will contract 3-to-4 per cent this year but it could shrink anywhere from 1 per cent to 9 per cent, depending on how events play out.

"Impacts at the larger end of this range could be seen if there was a sustained outbreak here, if credit markets were to seize up, or both," it said.

ANZ Bank is calling for "urgent intervention" from the central bank given current stresses, and expects large-scale asset purchases as soon as they can be deployed to provide more stimulus.

Westpac Bank economist Michael Gordon is tipping the economy to shrink by 3.1 per cent versus the 2.7 per cent contraction in 2008-2009 during the global financial crisis.

He also predicts swift action by the central bank.

"There is currently stress in financial markets. This could lead to an unintended increase in interest rates unless the RBNZ takes action. We predict that the RBNZ will begin quantitative easing within a week in order to keep interest rates low," he said.