Massive revisions to Gross Domestic Product data shows the economy took a sudden dive in March this year

New Zealand’s economy plunged into a deep recession in the second quarter of the year and has tumbled a terrible 2% in just six months; the worst fall since 1991.

There’s no need to rely on per capita or technical definitions of a recession any longer as the country is experiencing a substantial economic contraction in real terms. Gross domestic product (GDP) dropped 1.1% in the June quarter and another 1% in September. 

This is likely the low watermark, Treasury and the Reserve Bank (RBNZ) both forecast growth to resume after another flat quarter this December, but the sharp decline was a surprise. 

Kiwibank economists said the market only expected a 0.2% fall but the sudden drop didn’t necessarily set off alarm bells. 

“The larger falls have not changed the overall size of the economy … Essentially, the end point of the economy is not too different from what was originally published in June. But the path in getting there has changed,” they wrote in a note. 

Statistics NZ’s revisions have removed any sign of a previous technical recession and show the economy was either stagnant or growing throughout 2022 and 2023. It was only in April of this year that real growth started heading south. 

Of course, most of the growth in those years was driven by a fast growing population. GDP per capita has been falling since December 2022. It dropped 1.2% in the most recent quarter and is down a cumulative 4.8%; worse than after the Global Financial Crisis.

Real GDP has only risen roughly 1% in that same period and has fallen 1.8% year to date. 

While these numbers demand attention, the historical revisions actually mean the economy is slightly larger than economists thought it was a month or so ago. And the worst may be over. 

Stephen Toplis, head of research at BNZ, said the Reserve Bank may be “spooked” by the figures, which show the economy contracting at an annualised rate of over 4%, and would likely deliver another 50 basis point cut to the Official Cash Rate in February.

“We continue to believe the economy will be recovering relatively strongly in the second half of next year but that it will take a very long time before activity on a per capita basis gets back to its previous highs,” he said. 

Michael Gordon, a senior economist at Westpac NZ, said the electricity crisis had worsened the September data but that impact won’t be repeated in future quarters. 

Other sectors were also struggling, however. Services fell 0.5% which show the economic slowdown has spread beyond just interest rate sensitive sectors. The effects of high wholesale energy prices were clearly visible in a 7.3% fall in metal product manufacturing and 5.7% decline for wood and paper products manufacturing.

Infometrics said residential investment fell for the fifth consecutive quarter, making it the sector’s longest decline since 2007 and 2008. Non-residential investment also dropped.  

One bright spot was primary industries which grew 1% in September as forestry bounced back from a contraction in June, and as milk production increased.

Most bank economists agreed the data supported the case for further rate cuts, which RBNZ has signalled will happen in February, but warned against catastrophising the revisions. 

However, recession headlines are irresistible for the media and a red hot political football for politicians. The Labour Party was quick to pin the blame on Finance Minister Nicola Willis.

“[Willis’] cuts and austerity has fed the recessionary fire, and today’s GDP figures show this, recording the weakest 6-month period since 1991, excluding Covid-19,” said Barbara Edmonds, Labour’s finance spokesperson 

“There’s no creative accounting that Nicola can do to make these GDP figures better. This amount of economic shrink in six months is a dire result”. 

In a press release, Willis said the decline was the result of the high interest rates which had been required to tamp down inflation. 

“Encouragingly, inflation is now under control and growth is set to revive. New Zealanders can look forward to brighter prospects next year, but there is no avoiding the conclusion that we have work to do,” she said. 

“That is why the Government is acting to drive growth by fast tracking major projects, removing red tape, developing an infrastructure pipeline, refocusing the education system on core skills, negotiating additional trade deals, and better aligning support for science with New Zealand’s economic needs and commercial opportunities."