The New Zealand economy appears to be slowing faster than forecasters have realised as consumers begin to feel the full impact of high interest rates.
Financial markets were surprised by Statistics NZ’s gross domestic product data (GDP), released on Thursday, which showed a 0.3% decline in economic activity during the September quarter.
Economic activity in the services sector continued to grow. It was up 0.4% and accounts for two-thirds of GDP, but was more than offset by weakness in the physical economy.
Goods producing industries were down 2.6%. Wholesale trade was down 1.9%, retail fell 0.2%, and transport dropped 4.5%.
The consensus view had been for a 0.2% increase in the headline figure, and the Reserve Bank had forecast a 0.3% lift in its Monetary Policy Statement only last month.
Jarrod Kerr, the chief economist at Kiwibank, said the release had “shocked us all” and sent the NZ dollar and wholesale interest rates lower.
Currency traders had bid up the kiwi dollar on Thursday morning, after the US Federal Reserve said it was done with rate hikes, but sold it again after the GDP data was released.
ANZ Research says the GDP data was a “direct challenge” to the Reserve Bank’s view that demand in the economy was resilient.
“Inflation still isn’t licked in New Zealand, but if activity continues to slow in line with trends in today’s GDP data, it’s hard to see markets backing away from calls for cuts, especially with the Fed now signalling 75 basis points of cuts in 2024.”
On top of the soft September number, Statistics NZ revised the June quarter down from 0.9% to 0.5% and further revisions to the prior two quarters brought back the ‘technical recession’.
These revisions bring annual GDP growth to 1.3% and annual growth per capita to negative 0.3%. The per capita decline in the September quarter alone was 0.9%.
Miles Workman, an economist at ANZ, said the data showed plenty of economic pain at an individual level.
“Surging migration-led population growth means the economy at the individual household level is much weaker than headline GDP suggests,” he says.
Household expenditure was down 0.6% in the September quarter—despite population growth—and spending on durable goods dropped 3.2% to its lowest level since the pandemic lockdown two years ago.
Workman says the data release and revisions implied the economy was “running a little cooler” and monetary policy was “getting a little more traction” than previously thought.
However, it should not be interpreted as a catalyst for a rate cut, as sticky inflation remains a big concern for the Reserve Bank.
In November, Reserve Bank Governor Adrian Orr said the Monetary Policy Committee was impatient to get inflation back on target and would be tolerant of downside data surprises.
Darren Gibbs, an economist at Westpac NZ, says the GDP revisions mean the economy was 1.8% smaller in September than the Reserve Bank had estimated in its November Monetary Policy Statement.
“This will reduce the Bank’s estimate of the degree of inflation pressure that remained in the economy during that quarter — all else equal, lowering the prospect of a rate hike,” he said.
If the next inflation number, scheduled for late January, follows the softer trend, it would give the central bank room to “remain on the sidelines” and assess migration impacts.
Since it began increases in October 2021, the Reserve Bank has lifted the Official Cash Rate 525 basis points to 5.50%, and indicated another increase is possible next year.
47 Comments
Interest rates are there to protect the interests of the lenders. Isn't that where the name came from? All the other effects (unemployment, economic decline, etc) are unwanted effects
(BTW, If banks create money when they lend, we have no need for interest rates at all, and money is free from now!- Richard Werner, probably)
As soon as I heard about lockdowns and COVID, my first though was "we're gonna pay hard for this".
But we put everything on AMEX for a while to avoid the pain, and now it's due.
Official economists seem to only really interpret data publicly. Maybe there's some unwritten rule about not prophesizing the blatantly obvious too much.
The Govt will announce their 'mini-budget' next week. They will be cutting spending hard. This will directly reduce Govt and Household expenditure through 2024. We will be in a recessionary spiral. Some of us have been warning about this *for a year* while the conflicted bank reckonomists have been wailing about excess demand and the need to hike rates to 'get on top of inflation'.
Lowering interest rates might help with pulling out of the nosedive - it will reduce business costs and increase the disposable income of mortgagors who were not tempted onto long fixed rates by the aforementioned ghouls at the banks. However, lower rates will also juice the housing market, which is really poor quality economic stimulus.
The textbook response to a recession that looks like it is going to spiral out of control is increased Govt deficit spending. Govt can either do this voluntarily now and focus the money on things that matter (infra, housing, renewable energy etc), or they can wait to be forced into it late next year as welfare costs go through the roof. Unfortunately, we have a Govt that is stuck on some fundamentalist Reaganomics fantasy - the only KPI they have been clear on so far is the need to get Govt spending down below 30% of GDP. Clueless.
Now, how come inflation is high despite crashing consumer demand? Simple. Prices did not go up because consumer demand was high, and nor is plummeting consumer demand driving prices down. Our economy doesn't work like the articles on investopedia.
"how come inflation is high despite crashing consumer demand" - no it is because the inflation stats are out of date, inflation is no longer high.
Of course consumer demand causes inflation to some degree. It is very hard for a business to put up prices when there is little demand.
Last quarter's CPI inflation was 1.8%, noting that the Sep Quarter is usually high. We don't get the next CPI figure until Jan. The Selected Price Index, which is nearly half of CPI, is pointing towards much lower inflation over the last two months. Other articles here suggesting CPI could be as 0.3% appear to be backed by the SPI data, in fact, the SPI has actually decreased over the past two months so the actual CPI result could be lower.
If they are right, annualised CPI would be near the bottom of the RBNZ target range along with decreasing GDP. Sounds like a recipe for OCR cuts. It will be interesting to see how much data the RBNZ needs before it acts, given that the trend has been to act too slowly.
Yes I'm with you. I think CPI in January will surprise on the downside, and I think there is a good chance we are already within RBNZ target if you annualise the quarter. It would be crazy not to reduce rates next year if that was the case.
If the RBNZ still had the employment mandate they would have to reduce rates if inflation was within target. Without the employment mandate they don't have to but still will. The employment mandate just formalised something that is obvious anyway, that the RBNZ should choose lower rates over recession if inflation is under control.
Yes, the Selected Price Index has gone negative over the last few months and this means the CPI will be lower. But, look at what's pushing the downturn.... Deflation in the price of petrol, overseas accommodation, imported food, and international airfares, which are overpowering increases in rent, tobacco, and domestic accommodation / domestic airfares etc.
My point was that reduced consumer demand is not what is driving those price indices down.
Much of the inflation has been because businesses have been raising prices. https://www.theguardian.com/commentisfree/2023/jun/28/wage-rises-inflat…
Many good points here. I think key is to get robust DTI limits in place before interest rates start falling so that additional future spending gets directed towards productive investment rather than second hand houses, which achieves nothing apart from increasing exports of children
This might be a very unintelligent comment, but it seems we are at this point somewhat doomed to swing between interest rates being far too low and interest rates being far too high (in the context of how the wider economy is performing).
Assuming that interest rates work to tame inflation, would it not be better if we just did away with the whole issue of the reserve bank making the call on the OCR (where let's be real they will be subject to political and other pressures, and perhaps liable to do too little too soon and too much too late in either direction) and have more of an algorithmic approach - whatever the inflation rate is, the OCR is set at say 0.25% above that and there's no guesswork involved.
This doesn't fix the issues with using the OCR as an inflation fighting tool - as JFoe will no doubt, probably rightly so, remind me - but at the very least businesses and households would have confidence in knowing a bit more where interest rates might go.
I only say this because talking to some of my friends who are now being crushed under the weight of massively increased mortgage payments, a common theme seems to be "we never thought rates would go this high" (almost as if to say that they didn't think rates would be allowed to get so high, whatever inflation was doing). If it was written in stone that if inflation climbs, interest rates will keep climbing, maybe people would have thought first before leveraging property or buying too much house?
At least if we all knew the rules of the game prior to kick off, it might make for a fairer system.
Perhaps a braindead idea, but I fail to see what - if anything - Adrian Orr and his buddies at the RBNZ actually add at this point?
The problems with a formula are timing and smoothing. Inflation data is based on the past, OCR (and outlook) affects the future. A formula reacts after the problem, and can produce large swings which many will say are unfair.
The problem with not just having a formula is that you need reasonable projections, and we have problems getting reasonable historical figures.
I am probably the only one here that thinks the current system works fairly well (sure it may not be perfect). But the governor does need to be looking ahead, and I think Orr has been caught out trying to fight inflation of the past when the current enemy is now recession. I have been saying for a long time now that Orr has overcooked it, and he also overcooked the initial response to Covid. He should go back to the superfund where he did a great job.
But when you consider how much Covid affected both supply and demand, monetary policy has worked bloody well so far. We will get back to normal fairly quickly.
As for your friends, they shouldn't gamble on interest rates if they can't afford to lose. They could have split their mortgage and chosen 5 year rates to almost completely mitigate their risk. Banks really should recommend that for FHBs, the RBNZ should look to formalise that advice. They could have fixed 1/3 at 1 year, 1/3 at 3 years, 1/3 at 5 years for example.
Fair points.
To your last comment, I agree you shouldn't gamble if you can't afford to lose. However, we seem to live in a society where no matter who you are, whatever happens to you is always somebody else's fault.
To some extent, I'm sympathetic insomuch that for many people they just rely on what so-called experts in industries like property/economics tell them. If you're a hard-working teacher, for example, why would you necessarily question what the expert property talking head has to say?
Then again, I recall the (in law) family group chat on Facebook, where my brother-in-law proudly announced that his house had gone up $200,000 in value since he bought it (so had nearly doubled in the space of three years, it's a tiny little place). The last time such a celebration was seen, a certain man with a mustache had not long previously repainted the inside of a concrete bunker.
I tried to point out that a self-service 'free valuation' tool, hosted on a real estate agent's website and promoted with a postcard drop, probably isn't an unbiased source of information and should be taken with a grain of salt ... but I was drowned out with the cries of "now you can get another property with the equity".
I wish I was joking, but alas I am a deeply unfunny individual.
Seen very similar situations amongst my friends DT, some of whom dipped into the mythical piggy bank to buy silly expensive toys and property upgrades on leverage.
They now wished they’d never bought a house and are living the Pak n Save lifestyle on high incomes, with nothing to show for it.
Inflation depends on two types of inflation External and Internal.
External inflation is broadly decreasing now. Deflation is going to come out of China. Europe is flat. It looks like the US expansion has peaked. The oil price is down.
Internal price inflation has been kept high by increasing wages, higher rents and immigration to Auckland. Countering that has been a slowdown in business associated with housing and exports. Wage rises are slowing, some immigrants are finding it hard to get jobs which just leaves rents. If nothing else the National govts focus on reducing bureaucratic excess will reduce the padding at many levels of local and national govt. I'd say the overall balance is now disinflationary.
There are also at least three factors at play in the effectiveness of the RBNZ's interest rate moves - monetary expansion by the Reserve Bank, money expansion by overseas banks and credit institutions and fiscal expansion due to increased govt spending.
We have previously been in a situation where interest rate decreases were bolstered by govt fiscal expansion. Interest rate decreases actually became effective because low income people had money to spend. We have now transitioned to a situation where fiscal expansion will be contained except for the automatic stabilizers of unemployment and retirement payments. So a reduction in interest rates will be again like pushing on a string. There will be little effect from lower interest rates except through the effect on the housing market.
If I was the Reserve Bank I would hold fire on income to credit ratio laws because they may need people to borrow again going forward. As the Chinese govt has found once the credit bubble is popped it can't just be pumped up again, there are societal forces that take over the levers of credit and take them out of the govt's hands if you yank those levers back and forth too hard.
Labour made a pretty fatal error of linking govt spending to it's own political beliefs, so govt spending has become associated with wokeness and waste. It's unfortunate because we will need govt spending to back up interest rate cuts to get us out of recession if nothing else comes along, and we will need govt to spend on productivity-enhancing infrastructure and R & D going forward.
Immigration is going to put more pressure on increasing inflation, as it is creating more demand on a limited supply. The supermarket duopoly has no incentive to reduce prices, or not increase prices. Food prices also tend to rise around Christmas due to the extra demand. Some of the food prices at the moment are crazy. There are loss leaders to suck people in the store, but you have to really shop around. The grocer app can help.
J.C can you give all of us a definition of WOKE please?
It's a tough one but it has nothing to do with the original interpretation of woke that stemmed from African American culture to be politically minded about oppression, racism, etc. Those ideas have been hijacked to a large extent and morphed into something completely new. One can be 'progressively minded' and not 'woke.' I like to think of myself as the former.
Highly recommend reading 'What's Up with Kansas?' if you're interested in how the liberal elite have played a hand in the woke phenomenon.
Interweb says "What's the Matter with Kansas?".
There was a very interesting interview on RNZ with Batya Ungar-Sargon about her book "Bad News: How Woke Media Is Undermining Democracy". I think Jesse was squirming a bit.
Correct. Author is Thomas Frank. Part of the premise is how the working class have been thrown under a bus by the urban liberal elite. Typically white, rural / small town, etc. The type of people who can't work their way around a Thai menu in Grey Lynn. Kind of looked down upon.
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