WELLINGTON, March 16 (Reuters) – New Zealand’s economy missed forecasts for fourth-quarter growth, instead contracting 0.6%, official data showed on Thursday, increasing the likelihood of a recession and making further rate hikes less likely.
Gross domestic product (GDP) fell short of analysts’ expectations of a 0.2% contraction in the December quarter and was well below the Reserve Bank of New Zealand’s (RBNZ) forecast of 0.7% growth. It was a reversal from revised 1.7% growth in the third quarter.
The economic weakness is broad based and conditions for manufacturing, retail, trade and accommodation are already in recession, according to Statistics New Zealand data.
The central bank and finance ministry had both forecast that the country would enter a mild recession in the second quarter of 2023.
Economists said the weak data released on Thursday means the country may already be in recession, especially given the impact the severe weather in January and February is likely to have on the economy.
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“The outlook for Q1 remains bleak,” Capital Economics said in a statement.
New Zealand spent two quarters of 2020 in recession due to tight restrictions amid the COVID-19 pandemic, but before that the economy had not contracted since late 2010.
Regardless of whether the country enters a recession, the economy is significantly less overheated than the Reserve Bank of New Zealand (RBNZ) had expected.
The central bank has conducted its most aggressive monetary tightening since 1999, when the official interest rate was introduced, raising it by 450 basis points to 4.75% since October 2021.
The market is betting on the RBNZ’s plan to hike the official interest rate (OCR) another 75 basis points this year to 5.5% by the third quarter being rolled back.
“We see no need for the RBNZ to go to 5.50%, which would lead to unnecessary losses in activity and jobs,” Citi analysts said in a note, forecasting GDP contractions in the first and second quarters.
NZ bank bill futures are sharply higher as the market prices in a lower peak for RBNZ rates. The market is now 50-50 on whether the RBNZ rises 25 basis points (bps) in April while the final rate comes in at 5.11% rather than the bank’s 5.5% forecast.
The New Zealand dollar was in the red ahead of the data but extended the 0.6% decline to $0.6145. Two-year swaps are near a two-month low of 4.925% after falling sharply overnight as concerns in the banking sector drove bond yields lower around the world.
ASB Bank said in a note that data weakness and increasing nervousness in overseas financial markets indicated less urgency for RBNZ rate hikes.
“Uncertainty is elevated, but we have softened our OCR requirement to a 25 basis point increase from 50 basis points in April,” the statement said.
Reporting by Lucy Craymer; Editing by David Gregorio, Stephen Coates and Jamie Freed
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