New Zealand Economy Returns to Growth, Exiting Recession

New Zealand’s economy has emerged from recession with a slight expansion in the first quarter, according to data from Statistics New Zealand. Gross domestic product (GDP) grew by 0.2% compared to the previous quarter, surpassing economists’ expectations of 0.1% growth. Additionally, GDP rose by 0.3% compared to the same period last year, exceeding the estimated 0.2% growth. However, the economy is still facing challenges, as the Reserve Bank of New Zealand maintains its key interest rate at 5.5% in an effort to control inflation. This high borrowing cost is limiting consumer spending and business investment, despite the positive impacts of strong immigration and a recovering tourism sector. Economists predict that growth will remain minimal for the rest of the year, with indicators suggesting a soft performance in the second quarter.
The New Zealand dollar initially rose but later stabilized, trading at 61.32 US cents at 1:30 p.m. in Wellington. Bond yields and swap rates also increased.

Regarding the timing of rate cuts, despite the GDP result aligning with the Reserve Bank of New Zealand’s (RBNZ) forecast, the economy has only experienced growth in two out of the last six quarters.

Nevertheless, the central bank indicated last month that it has no plans to lower rates until the second half of 2025 due to persistent core inflation.

RBNZ Chief Economist Paul Conway stated yesterday that the economic slowdown caused by tight monetary policy is necessary to bring inflation back within the bank’s target range of 1-3%, which is expected to occur later this year.
According to an economist, the current economic environment is characterized by slow to negative growth. However, there is a slightly more positive outlook for growth in the future, while the expectation is for inflation to continue declining. Despite experiencing some short-term challenges, the belief is that the benefits of low and stable inflation will outweigh the pain.

Most economists predict that the first rate cut will occur in the final months of 2024 or early 2025. Swaps data suggests that investors have already factored in a 25 basis-point cut to the Official Cash Rate by November.

Bloomberg Economics highlights that the expansion observed in the first quarter could be a temporary relief from recessionary conditions. They anticipate that the economy will struggle throughout 2024 until the central bank changes its policy and focuses on supporting growth later in the year.
According to the statistics agency, the first-quarter growth was driven by an increase in tourist spending and growth in dairy and forest output. Out of the 16 industries, 8 showed an increase in production, while manufacturing and construction declined.

However, GDP per capita decreased by 0.3% from the fourth quarter, marking the sixth consecutive quarterly decline.

Miles Workman, a senior economist at ANZ Bank in Wellington, commented that despite the latest data, the economic momentum remains weak, particularly in terms of domestic demand and per capita perspective. He added that they are still confident in their prediction of interest rate cuts starting from February 2025.

This article has been updated to include the economist’s comment.