New Zealand economy grows strongly in Q3, but recession clouds ahead
WELLINGTON -New Zealand’s economy saw surprisingly strong growth in the third quarter, fuelling expectations the central bank will continue its aggressive rate hiking cycle as it tries to get inflation at three-decade highs under control.
While growth in the quarter was broad-based with tourism, construction and transport leading the way, signs of an impending slowdown caused by high interest rates and falling housing prices are starting to appear.
Both the country’s Treasury and central bank expect the country to move into a recession in the second quarter of next year.
Official data out on Thursday showed gross domestic product (GDP) rose 2 percent in the September quarter, more than double forecasts for a 0.9-percent gain and improving on the revised 1.9 percent rise seen in the second quarter. Annual growth jumped to 6.4 percent – in part due to the influence of various lockdowns on growth in New Zealand in 2021.
There was no market reaction to the GDP data with the New Zealand dollar trading largely steady at $0.6454.
“A fair chunk of this quarter’s whopper growth is an artifact of one-off drivers: the big surge in service activity and exports driven by the opening of the NZ border,” ASB Bank economist Nat Keall said in a note.
New Zealand’s borders fully reopened on August 1, which drove up growth in both international and domestic travel, returning travel-related activity to pre-COVID-19 levels.
Rates to rise
While growth is set to slow over 2023, Keall said the current strength in the economy suggests activity is proving exceedingly resilient. ASB Bank is expecting the central bank to hike by between 75 basis points and 100 basis points at its next meeting in February.
The Reserve Bank of New Zealand’s ninth straight hike last month means the cash rate has risen 400 basis points since October 2021 and is now at a level not seen since January 2009. The central has signalled it has further to go as it looks to engineer a shallow recession to stop inflation become entrenched.
Private consumption data was a weak spot in the data, contracting 0.1 percent on the quarter following a 3.4-percent contraction in the prior quarter.
“Clearly, the household sector is in belt-tightening mode as high inflation, falling house prices, and higher interest rates weigh,” ANZ economist Miles Workman said in a note, highlighting the economy’s softening trajectory as a tight labour market begins to loosen.
