New Zealand economy surprisingly contracts as Covid spread

NEW ZEALAND'S economy unexpectedly contracted in the first quarter as Covid-19 ran rampant through the population for the first time and interest rates rose in response to soaring inflation.

Gross domestic product (GDP) fell 0.2 per cent from the fourth quarter when it gained 3 per cent, Statistics New Zealand said Thursday (Jun 16) in Wellington. Economists forecast a 0.6 per cent increase. From a year ago, the economy expanded 1.2 per cent, just half the 2.4 per cent predicted by economists and cooling from its 3.1 per cent annual pace in the previous quarter.

The slowdown is unlikely to deter the Reserve Bank from raising borrowing costs further to get control of inflation, which may exceed 7 per cent this quarter. With house prices falling and global uncertainty elevated, some economists say the risk of a recession in 2023 is rising.

“We don’t think that this will trouble the central bank,” said Michael Gordon, acting New Zealand chief economist at Westpac Banking in Auckland. “The RBNZ’s aim is to better align demand with the economy’s potential in order to bring inflation pressures under control. A modest fall in activity would actually be helpful in that regard.”

The New Zealand dollar fell as much as 0.4 per cent after the data. It bought 62.77 US cents at 11.28 am in Wellington, down from 62.84 US cents beforehand. Bond yields and swap rates fell, with the yield on 2-year government debt extending its decline to 17 basis points.

Expectations for quarterly GDP varied widely. Three of New Zealand's biggest banks tipped zero growth while the Reserve Bank forecast a 0.7 per cent expansion. Only one of 18 surveyed economists called a contraction.

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Covid disruption

The economy was disrupted in the first 3 months of the year when Covid-19 swept the entire country for the first time. That left many industries short of staff and customers as people isolated or worked from home.

At the same time, the tourism industry was struggling behind a closed border and soaring fuel and food costs began to damp discretionary spending. The government cut fuel taxes in mid-March to provide relief for consumers and began progressively opening the border to foreign visitors from April.

The RBNZ, which started raising rates in October, last month announced a second successive half-percentage-point hike. It increased the Official Cash Rate to 2 per cent and signalled it wanted to raise the benchmark "at pace" toward 4 per cent.

Most economists see another half-point increase in July but many tip quarter-point adjustments thereafter as higher borrowing costs start to squeeze households.

House prices dropped 5.6 per cent in the 3 months through May as higher mortgage rates started to bite, the Real Estate Institute said yesterday.

Other details

The first-quarter contraction was led by primary industries and manufacturing, while services were flat, the statistics agency said.

• Manufacturing output fell 1.4 per cent from the fourth quarter, led by machinery, food and beverages

• Construction rose 1.7 per cent, led by residential building

• Mining, fishing and forestry output declined, while farm production gained 0.9 per cent

• Retail and restaurant spending fell

• Investment rose 1.2 per cent

• Exports fell 14 per cent led by tourism and international education as the border stayed closed; imports fell 2.8 per cent

• GDP per capita fell 0.5 per cent from the fourth quarter BLOOMBERG