GDP: What does the shrinking economy mean for interest rates?

What does the latest GDP data mean for the Reserve Bank's interest rate outlook?

New Zealand has narrowly avoided a technical recession based on Gross Domestic Product data released yesterday, but struggling Kiwis who find that hard to accept can take heart - for once the economists agree.

It looks like a recession, it feels like a recession... it is a recession.

“The economy is unequivocally weak,” said BNZ head of research Stephen Toplis. “Throw away the concept that you need two-quarters of negative growth to be in a recession. We’re in a recession and have been for almost two years.”

Kiwibank chief economist Jarrod Kerr also noted that dipping in and out of contraction and expansion was doing little to mitigate the pain of the long downturn.

“Red, black, red, black and now back into red. We’ve recorded a triple trough in economic activity. But it’s effectively a recession that’s lasted two years,” he said.

Westpac senior economist Michael Gordon had previously described the current economic situation as “a rolling maul of recession”.

The 0.2% contraction recorded in the second quarter GDP data was a better performance than had been expected by most economists. The Reserve Bank had forecast a drop of 0.5%.

Gordon described that as “something of a relief”. But regardless, there was little to cheer about.

On a per-person basis, economic output declined for the seventh straight quarter. It was down 0.5% compared to the previous quarter. Compared to a year ago, per capita GDP was down 2.7%.

“We’ve experienced strong population growth, which is supporting output,” said Kerr. “Activity would have been much worse without the surge in population.”

The better-than-expected June quarter result was undercut by a revision to the first quarter figure - down from 0.2% growth to just 0.1% - taking the economy right to the edge of the technical two-quarter definition of recession.

There was also some risk that a smaller slump this quarter was a timing issue pointing to a deeper slump in the current, third quarter.

“We anticipate that [the] better than expected GDP result could set the stage for a further weakening in activity in the current September quarter, given a number of still weak data flows across various indicators,” said Infometrics principal economist Brad Olsen.

Finance Minister Nicola Willis acknowledged the tough times being faced by families and businesses but pointed to recent indications - including business confidence and falling inflation - which showed the economy was starting to bounce back.

“The New Zealand economy is resilient, and it will recover,” she said. “Brighter days are ahead.”

If there was an upside to the gloomy assessment of the data, it was for mortgage holders.

No one expected it to divert the Reserve Bank from plans to cut interest rates further.

The only issue up for debate was whether it needed to cut by 25 basis points or 50 basis points when it delivers its next update on October 9.

“The economy is still contracting, and there’s enough evidence that the Bank can continue to ease interest rates over the rest of 2024 and into 2025 in line with their latest forecasts,” Olsen said.

However, the better-than-expected performance could reduce expectations of a larger 50 basis point cut in October which some in the market have been betting on, he said.

ANZ economist Henry Russell also said he didn’t see the GDP data as a game changer for the RBNZ.

“We don’t see these data as a game changer for the monetary policy outlook,” he said.

“We continue to expect the RBNZ to deliver 25bp cuts at each meeting, allowing time to assess the economy’s responsiveness to easing.

“Financial markets had been attributing more than 50% odds of a 50bp cut by the RBNZ. We’ve always felt the market was getting ahead of itself, and the better-than-feared out-turn versus the RBNZ’s forecast should pour some cold water on the idea of outsized cuts (at least in the near term).”

But others weren’t so sure. Markets odds on a 50 basis point cut remain strong in the wake of those of an equivalent cut to rates by the US Federal Reserve this week.

Australian-based economists at UBS shifted their forecast from 25 basis points to a 50 basis point cut, citing the US Federal Reserve move and continued deterioration of the Chinese economy as reasons.

Kiwibank also argued that more aggressive rate cutting was needed to turn the economy around.

“Today’s miserable economic report card proves that restrictive monetary policy has done enough damage to restrain inflationary pressures,” Kerr said.

“Enough is enough. And the RBNZ are responding – late, but in earnest. A rate cut in October is as close to a done deal as you get. We’d argue the only discussion should be on delivering 25 or 50. We’d advocate 50. And again, 50 in November.”

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here.