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.
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