New Zealand’s economy entered recession in the March quarter, just.
The contraction wasn’t large, at 0.1 per cent it was statistically flat. It was tight enough that it could yet be reversed out when the figures are inevitably revised next quarter.
But following a larger contraction in the last quarter of 2022 (revised down from -0.6 to -0.7) it meets the technical definition even if low unemployment makes this one feel very different to the historic downturns of 1991/2 and 2008/9.
So what then does it mean, if anything?
“Sidestepping the debate about what constitutes a recession, it’s clear that the New Zealand economy is losing momentum,” said Westpac senior economist Michael Gordon.
“That’s to be expected - indeed it would be staggering if it didn’t happen, in light of the substantial rise in interest rates over the last two years,” Gordon said.
“What remains to be seen is whether things have slowed enough to put us on a path back to low and stable inflation.”
Economists and markets have dialled back on expectations for another official cash rate hike and now see the Reserve Bank looking safe in its call that interest rates have peaked.
In the minutes following the release, the New Zealand dollar fell to US61.96c from US62.13c.
In wholesale interest rates, the two-year swap rate eased to 5.37 per cent from 5.39.
On an annual basis, the economy grew 2.2 per cent.
Despite the quarterly decline being less pronounced than in late 2022, just over half of industries declined in the March 2023 quarter.
Business services were the biggest downward driver, down 3.5 per cent.
This was partly offset by a 2.7 per cent increase in information media and telecommunications.
“Management consulting, advertising, scientific, and engineering design services drove the fall in business services,” Stats NZ said.
The March 2023 quarter included the initial impacts of Cyclones Hale and Gabrielle and teachers’ strikes.
“The adverse weather events caused by the cyclones contributed to falls in horticulture and transport support services, as well as disrupted education services,” Attewell added.
A 2.4 per cent increase in household consumption expenditure and a 2 per cent growth in investment in fixed assets partially offset the falls.
The household expenditure growth was led by increased spending by New Zealanders on international travel.
In contrast, households spent less on goods, especially grocery food.
Kiwibank economist Jarrod Kerr said he expected to see things get worse before they got better.
“We expect further contractions in economic activity over 2023, and possibly into 2024. Government tax revenues have come in well below forecast, with both GST and corporate tax undershooting.”
Household consumption looked to be contracting and confidence among businesses and households remained low, Kerr said.
“Demand is being weighted down by rising interest rates. If households spend less, which is what we are seeing, then the economy will contract harder. If businesses pull back on their hiring and investment, which is what we’re hearing, then the economy will contract harder.”
The forecast slowdown would drive “a loosening” in the labour market, he said.
“Add to that the migrant-led increase in labour supply, at a time when demand is turning south. We may see the unemployment rate rising to 5-5.5 per cent in 2024.”
But as the labour market loosened, its inflationary impulse would soften.
“At the end of the day, it’s all about inflation,” he said.
UBS economist Nic Guesnon said the data confirmed his view the economic cycle was turning faster than the consensus of economists and the Reserve Bank had forecast.
“By the middle of 2023, we expect the weaker activity levels will start feeding into price-setting behaviour, and hence in late 2023 we expect the labour market data to show more signs of loosening.”
If there is any upside to the recessionary data, it might confirm the RBNZ’s view that no further interest rate hikes are necessary, economists said.
The weaker data would “do little to disabuse it of the notion that it may have thrown enough cold water on the economy and hiked the OCR enough,” said ASB economist Nathaniel Keall.
“But it’s only one data point, and a backwards-looking one – business survey, inflation and labour market data over the coming quarters will be key things to watch.”
Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.