New Zealand Plunges into Recession, Prompting Calls for Deeper Rate Cuts

New Zealand's economy has fallen into recession, contracting far more sharply than anticipated in the third quarter, according to data released on Thursday by Stats NZ, as reported by Reuters. This dire outcome, exceeding even the Reserve Bank of New Zealand's (RBNZ) own pessimistic forecasts, is prompting calls for more aggressive interest rate cuts.

Gross domestic product (GDP) dived by 1.0% in the September quarter, significantly exceeding market expectations of a 0.2% contraction. The June quarter was also revised downward to show a 1.1% decline, confirming the economy's slide into recession – defined as two consecutive quarters of negative growth.

This marks the largest two-quarter decline since 1991, outside of pandemic-induced recessions.

"It was dramatically worse than anyone had expected," said Abhijit Surya, an economist at Capital Economics, to Reuters. "Given the dire state of the economy, we now think risks are tilted towards a larger 75bp cut in February."

The RBNZ had already cut interest rates by 125 basis points to 4.25% this year, but this latest data strengthens the case for further easing. Swaps markets now indicate a 70% probability of a 50 basis point rate cut in February.

Finance Minister Nicola Willis pointed the finger at the central bank's role in the economic contraction.

"The decline reflects the impact of high inflation on the economy," Willis stated in a press release. "That led the Reserve Bank to engineer a recession which has stifled growth."

The weakness in the September quarter was broad-based, with significant contractions in manufacturing, utilities, and construction. Household and government spending also fell during the quarter, while investment and exports also dragged on growth.

For the year to September, output fell by a steep 1.5%, the sharpest decline since the pandemic and well outside forecasts of a 0.4% dip. With New Zealand's population increasing by 1.2% to 5.35 million in the year to September, GDP per person slid by an even larger 2.1% for the year.

Despite the severity of the recession, some analysts remain optimistic that the worst is over, given the RBNZ's recent aggressive rate-cutting cycle. An ANZ survey of businesses released on Thursday showed some signs of recovery in activity in December, with confidence holding near historic highs.

"The survey showed more signs of demand recovering, with the first decent lift we've seen in past activity, which is the best GDP indicator in the survey," said Sharon Zollner, head of New Zealand economics at ANZ, to Reuters. "The bar for things to improve from here is clearly pretty low."