New Zealand’s rising recession risk suggests tightening may slow
NEW Zealand’s economy contracted by more than expected in the final three months of 2022, putting it on the brink of recession and prompting investors to lower bets on the pace of further interest-rate hikes.
The currency and government bond yields declined after gross domestic product fell 0.6 per cent from the third quarter, compared with expectations for a 0.2 per cent drop, official data showed on Thursday (Mar 16). Should the economy fail to expand in the current cyclone-hit quarter, as some economists forecast, it would have entered a recession six months earlier than the Reserve Bank of New Zealand (RBNZ) predicted.
That could prompt policymakers to further slow the pace of tightening, and money markets are pricing in just a 50 per cent chance of a rate rise at the Apr 5 meeting, from 95 per cent yesterday. Financial stress at Credit Suisse Group and the collapse of Silicon Valley Bank in the US further cloud the picture and are damping expectations for further hikes by the Federal Reserve.
“The crucial thing for the RBNZ is that the starting point for the economy is substantially less stretched than they thought,” said Michael Gordon, acting New Zealand chief economist at Westpac Banking. “And that matters for how much of a slowdown is needed to bring inflation back under control.”
New Zealand’s dollar dropped to as low as 61.40 US cents in Wellington after the release, from 61.86 US cents beforehand, before paring losses. Bond yields also slid.
The RBNZ, which is aiming to engineer a recession in 2023 to suppress demand and rein in inflation, predicted growth of 0.7 per cent for the fourth quarter. The central bank had forecast the economy would enter recession in the second quarter of this year.
The earlier slump in growth adds to signs that higher borrowing costs are starting to curb consumption and could slow inflation faster than the central bank expects.
That suggests it won’t need to be as aggressive with rate hikes as it projected last month, when policymakers lifted the Official Cash Rate (OCR) by 50 basis points to 4.75 per cent and maintained a forecast that it will reach 5.5 per cent this year.
Most economists expect the RBNZ will raise the OCR by 25 points next month.
ASB Bank economists today said they no longer expect a 50-point move, saying “the weaker starting point for economic activity and increased financial markets jitters overseas suggest less urgency for RBNZ rate hikes.”
Prospects of a shrinking economy will pose a headache for Prime Minister Chris Hipkins who faces an election in October. The ruling Labour Party is under pressure to deal with a cost-of-living crisis and faces a significant fiscal bill to rebuild after a recent cyclone.
Today, the Council of Trade Unions, which is aligned with Labour, said it would “question the need for further significant increases in the OCR as growth is declining more quickly than anticipated and further hikes may cause unnecessary economic pain for working people”. BLOOMBERG
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