New Zealand dips into recession, putting rate hikes in doubt

New Zealand slipped into recession as the economy shrank in the first quarter, data showed on Thursday, reducing the risk the central bank would need to hike interest rates further but creating a new headwind for the government's re-election hopes. Gross domestic product (GDP) matched analysts' expectations of a 0.1 per cent contraction in the March quarter but was well below the Reserve Bank of New Zealand's forecast of 0.3 per cent growth. Furthermore, fourth-quarter GDP was revised to a contraction of 0.7per cent from a decline of 0.6per cent

The New Zealand dollar slipped 0.2 per cent to $0.6197 after the data as it was in line with market expectations and gave traction to the central bank's position that no further interest rate hikes would be needed.

Weakness in the economy was broad-based with output from half of the country’s industries contracting, according to the Statistics New Zealand data. Growth was hurt by the impact of two major cyclones and flash floods in Auckland in January and February.

"It's clear that the New Zealand economy is losing momentum," Westpac senior economist Michael Gordon said in a note. "What remains to be seen is whether things have slowed enough to put us on a path back to low and stable inflation.”

Employment remains strong in New Zealand, limiting the effects for many people of a recessionary environment.

However, while the recession remains technical after two consecutive quarters of contraction, it has become a significant political issue as New Zealand heads towards an election in October, with voters struggling with higher living costs.

Inflation in New Zealand is tracking at 6.7 per cent, well above the central bank’s target band of 1 per cent to 3 per cent.

Economists say indications that momentum is slowing will be welcome by the central bank, which has said it was trying to engineer a recession to rein in inflation in its most aggressive policy tightening since 1999, when the cash rate was introduced.

The cash rate, now at its highest level in 14 years at 5.5 per cent, has risen 525 basis points since October 2021, and the central bank at its last meeting May said the cash rate had now peaked.

"As demand-side pressures on inflation continue to abate, the case for rate cuts will become increasingly compelling," Capital Economics economist Abhijit Surya said in a note.