Statistics NZ has confirmed that the economy contracted in the March quarter by 0.1%, making this the second consecutive quarter when GDP fell. This slim decline puts the country’s economy into a technical recession and reduces the likelihood that the central bank will need to hike interest rates further. This is good news for the government that has been attempting to rein in inflation using interest rate hikes.
The economy’s contraction of 0.1% does fall below RBNZ estimates that the economy would grow by 0.3% in the March quarter. Fourth quarter results were also revised downward from a reported contraction of 0.6% to 0.7%. Disposable income per capita was also found to have dipped by 2.2% in the December quarter and 0.9% in the March quarter. This comes at a time when the country’s population has risen thanks to an increase in migration in recent months.
Data released also indicated that output from about half of the country’s industries also fell, demonstrating that the weakness in the economy was broad-based. The business services segment was the biggest contributor to the recession, declining by 3.5%. The situation was further worsened by the impact of recent cyclones, flash floods, and teachers’ strikes in the March quarter.
Although there was a 2.4% increase in household consumption, less was being spent on goods, particularly grocery foodstuffs. Kiwibank economist, Jarrod Kerr, notes that with reduced household spending, the economy will likely contract even more in 2023, and possibly 2024. He also predicts that unemployment will rise as migration boosts labour supply and businesses cut back on hiring and investment.
Westpac’s senior economist, Michael Gordon, said that the economy was losing momentum but it remained to be seen if the slowdown was enough to bring about a low and stable inflation. Inflation is at 6.7%, which is higher than the central bank’s target of 1% to 3%.
ANZ chief economist, Sharon Zollner, did express some optimism that although times would feel tougher for households, it would likely not become as bad as it was in 1991. She commended the low unemployment rate and highly rated job security by consumers.
Major banks like ANZ and BNZ have recently increased their rates on home loans, making it likely that the cost of living will rise for Kiwis. Economists like Kerr are, however, hopeful that this will be amongst the last of such increments, with mortgage rates likely to start being reduced by the end of the year.
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