A major bank has changed its official cash rate (OCR) prediction after the latest data showed New Zealand’s gross domestic product (GDP) shrunk in the fourth quarter of 2022.
Data released by Statistics New Zealand on Thursday showed GDP contracted by 0.6 percent – down from 1.7 percent growth in the September quarter.
Manufacturing, down 1.9 percent, was the largest contributor to the decline in economic growth.
Another decline is forecast in the March quarter, which would place New Zealand in a technical recession.
In response to the data, ASB tweaked its OCR predictions – now expecting a 25 basis point hike in April. But the bank is sticking to its prediction that the OCR, which is currently 4.75 percent, will peak at 5.25 percent.
In an update on Thursday, ASB economist Nathaniel Keall said the GDP figures were close to the bank’s forecast but weaker than both the consensus and Reserve Bank of New Zealand views.
“As we expected, weak manufacturing output and retail trade were the biggest weights on growth,” Keall said.
“The path of the economy is going to be lumpy over the coming quarters, with recession in New Zealand a distinct possibility.”
Keall said GDP figures are “volatile, backward-looking and prone to substantial revisions at the best of times”.
“The volatility is doubly so in the present environment, with the pick-up in travel over the latter part of 2022 and the impact of Cyclone Gabrielle keeping the path of growth lumpy,” he said.
“The hit from the Cyclone is likely to have constrained growth in [the first quarter] given the disruption to both primary production and services activity.”
Keall said the rebuild from Cyclone Gabrielle is likely to boost construction and spending in the short term, while houses and infrastructure are repaired. But he said in the medium term, “substantial headwinds are building for the New Zealand economy”.
“Headwinds to growth are manyfold. With inflationary pressures proving stubbornly persistent, the RBNZ has implemented a substantial amount of monetary tightening to cool the economy already, with much of the impact still not entirely felt.
“A cooler housing market is likely to weigh on construction. Cost of living challenges, higher debt servicing costs and soggy consumer confidence will soften consumer spending. Slowing global growth will cap demand for NZ exports.”
Keall said while the economy has been resilient so far, a recession is likely this year. He said while inflation is still high, financial market jitters overseas and the GDP figures mean the RBNZ needs to take a cautious approach to any further tightening.
“The weaker starting point for economic activity and increased financial market jitters overseas tip the balance a little in favour of a more cautious approach to any further tightening at the coming RBNZ meetings.
“Uncertainty is elevated but we expect the Bank will want to move in smaller increments from here, and now expect two 25 bps OCR hikes at the next two meetings, instead of a 50 bps lift in April (maintaining our 5.25 percent OCR peak view).”
Keall said OCR cuts aren’t expected until mid-2024 but “pronounced weakness” in the economy could see that brought forward if the labour market and inflation cool sharply.
Infometrics economist Joel Glynn said the GDP drop was “larger than anticipated” and was driven by several factors.
Glynn said flat household consumption in the figures suggests increasingly difficult economic factors are starting to hit households.
“We expect ongoing weakness in household spending throughout 2023 and early 2024 will slowly ease inflationary pressures,” he said.
He said overall less upbeat spending and investment highlights demand is weakening, which will help get inflation under control.
But he said the RBNZ’s work isn’t done yet with further interest hikes required to fully tame inflation.
Inflation has been stubbornly high for months with the RBNZ hiking the OCR from 0.25 percent in August 2021 to 4.75 percent this February.
The last time the OCR was this high was in December 2008.