Perversely, confirmation that New Zealand slipped into recession in the first quarter is likely to be good news for homeowners, adding weight to the Reserve Bank’s view that interest rates have peaked.
While recessions are not a good thing, this is not a typical recession.
The problem with this economy is inflation, not unemployment. It is the high cost of living that is making people feel like they are going backwards.
The Reserve Bank (RBNZ) has been quite explicit about its Official Cash Rate (OCR) hikes being designed to cool the economy - potentially pushing it into recession.
So the news that the economy entered recession sooner than expected comes with an upside - especially for those worried about rising mortgage rates.
One Sydney-based economist now sees the RBNZ cutting the OCR by the end of the year.
“With New Zealand now in recession, we’re more confident that the RBNZ will start cutting rates by [the fourth quarter] of this year,” said Abhijit Surya, of Capital Economics.
“The 0.1 per cent contraction in production GDP was in line with what most, including ourselves, had expected. Crucially, however, it was much weaker than the growth of 0.3 per cent that the RBNZ had predicted in its May monetary policy statement.”
While Capital Economics is an outlier in its expectation of rate cuts this year, others saw the recessionary news as confirmation the Reserve Bank was looking safer in its call that the OCR has peaked.
“With the economy in decline, inflation about to fall quickly, and the labour market easing aggressively, the RBNZ would have to view today’s result as confirming evidence that no more needs to be done,” said BNZ senior economist Stephen Toplis.
“Of course, weak activity is no guarantee inflation will be brought to heel, but we continue to believe the RBNZ is unlikely to have any need to raise rates further this cycle,” Toplis said.
“The question is more about when it will cut and by how much.”
The BNZ is forecasting the first OCR cut will come in May 2024.
Economist John Carran, with brokers Jarden, said: “Weaker March quarter GDP growth will provide some justification for the RBNZ’s recent monetary stance. The RBNZ is focused on inflation and wage growth, so will not be swayed too much by the recent GDP data on its own. On this score, we see inflation and labour market pressures abating, which should allow the RBNZ to keep the OCR at its current rate until the end of the year.”
ANZ’s Miles Workman said the data GDP data would have surprised the RBNZ but noted, “they still have a sticky inflation problem to solve before considering OCR cuts”.
“We don’t think today’s noisy data are sufficient to knock the RBNZ off the course it set in May: to ‘watch, worry and wait’ for a period with the OCR at 5.5 per cent,” Workman said.
Inflation is still far too high for the Reserve Bank at 6.7 per cent. The RBNZ is mandated to get it back between 1 and 3 per cent. The consensus of economic forecasts is that it will fall to around 4.5 per cent and won’t be back at the target until late next year.
The RBNZ had forecast the economy to fall into recession in the second half of this year.
Market pricing for debt fell after the GDP data was announced, suggesting traders also now see it as more likely that the cycle for interest rates is done.
Meanwhile some economists - like KiwiBank’s Jarrod Kerr - argued the early arrival of the recession showed the Reserve Bank had already hit the economy too hard with rate hikes.
“It’s important to note that the full force of the RBNZ’s rapid rate rises is still working its way through,” Kerr said. “The last rate rise, to 5.5 per cent, was delivered in May. And rate hikes can take up to two years to work through the economy.”
“We said it at the time, and we’ll say it again: the RBNZ should have paused at 5 per cent. We think we’ll find that the RBNZ’s heavy hand did too much. It’s less about where we have been, and more about where we are going. And the outlook remains awkward, to put it politely.”
Economists do see the slower economy adding to unemployment as businesses cut back.
“Add to that the migrant-led increase in labour supply, at a time when demand is turning south,” Kerr said. “We may see the unemployment rate rising to 5, 5.5 per cent in 2024. As the labour market loosens, its inflationary impulse will soften.”
The official unemployment rate is currently sitting near record lows at 3.4 per cent.
Property specialist CoreLogic didn’t see the economic slowdown being enough to put more downward pressure on the housing market.
There have been signs in the past few weeks that the property market slump is nearing its bottom, with the rate of price falls declining and surveys showing the public is more confident about the outlook.
The downside of the recession for the property market was generally pretty limited, said CoreLogic economist Kelvin Davidson.
“With employment still strong, the confirmation of a recession in terms of economic activity over late 2022 and early 2023 is unlikely to trigger expectations of renewed or further downward pressure for property values,” Davidson said.
“What happens next is where the focus will be and is arguably of much greater importance. The lagged effects of previous increases in interest rates are yet to take their full toll on household finances, but encouragingly, most analysts now expect the economy to be on a slow but steady growth path from here on.”
“Employment isn’t expected to drop much either, if at all. In other words, the worst in terms of economic performance may now be in the rearview mirror.”
Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.
Economic recovery is coming but won't solve structural problems.