NEW Zealand may be flirting with recession much sooner than the central bank expected.

The economy contracted 0.2 per cent in the final three months of last year, according to a Bloomberg survey of economists ahead of data due on Thursday (Mar 16) in Wellington. Should it fail to expand in the current cyclone-hit quarter, as some economists forecast, the country would have entered a recession six months before the Reserve Bank of New Zealand (RBNZ) predicts.

“We’ve seen quite a bit of slowing in large parts of the economy,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “At this stage, we think we may have recorded a gain in the first quarter, but obviously the risks of a recession are growing.”

New Zealand’s economy has been surprisingly resilient in the face of aggressive rate hikes from the RBNZ, growing 2 per cent — more than twice as much as expected — in the third quarter. Evidence of a sharp slowdown could prompt the central bank to further slow the pace of its monetary tightening or stop before it reaches its forecast peak.

Policymakers last month lifted the Official Cash Rate (OCR) 50 basis points to 4.75 per cent, slowing from the 75-point hike at their previous decision but maintaining a forecast that it will reach 5.5 per cent this year.

Investors have pared bets on the RBNZ delivering another 50-point hike in April, swaps pricing shows. Westpac New Zealand economists on Monday said they now expect a 25-point move, citing a less overheated economy than the RBNZ anticipated. The central bank predicted growth of 0.7 per cent for the fourth quarter.

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Thursday’s data will show annual growth in the gross domestic product (GDP) almost halving to 3.3 per cent from 6.4 per cent in the third quarter, according to the survey.

Lower OCR peak?

Bank of New Zealand (BNZ) senior economist Craig Ebert cautioned against reading too much into the possibility of the economy already being in recession but said the notion that activity is undershooting RBNZ expectations needs to be taken seriously.

BNZ forecasts a 25-point rate hike in April and another one in May, with the RBNZ then stopping at a cash rate of 5.25 per cent. ANZ New Zealand and ASB Bank economists also see the cash rate topping out at 5.25 per cent.

ASB forecasts a 0.5 per cent contraction in fourth-quarter GDP followed by four negative quarterly readings this year. That won’t prevent inflation from remaining above 7 per cent for most of 2023, it predicts.  

A weak GDP number on Thursday “won’t necessarily swing the RBNZ off course from delivering at least another 50 basis points of OCR increases”, said ASB chief economist Nick Tuffley. However, “the bottom line is the economy has started to lose momentum”, he said. BLOOMBERG