New Zealand’s economy likely in recession as rate hikes take hold

WELLINGTON  – The New Zealand central bank’s aggressive hiking of the cash rate likely pushed the country into a technical recession in the first quarter, a Reuters poll found, giving traction to the idea the cash rate may have peaked.

Gross domestic product (GDP) is expected to be down 0.1 percent in the March quarter, below the Reserve Bank of New Zealand’s (RBNZ) forecast of 0.3 percent growth, according to a Reuters poll of 13 economists.

This would mean the country moved into a technical recession – two consecutive quarters of negative growth – after the economy contracted by 0.6 percent in the fourth quarter.

New Zealand’s central bank last month signaled it was done tightening after raising rates by 25 basis points to the highest in more than 14-years at 5.5 percent, ending its most aggressive hiking cycle since 1999.

NZ central bank signals done raising rates after hiking to 14-year high

New Zealand central bank raises cash rate by 25 bps to 5.5%, at forecast peak

Yet a handful of economists think the boost to the economy from historically high migration and the return of tourism might force the central bank to do more. The markets still give a 50-percent chance that there will be a further 25 basis point hike by October.

“Most forecasters, ourselves included and RBNZ and Treasury up until the budget, were all forecasting a recession to start about now. The fact that it started nine months ago, just shows us that we’re on a much weaker footing than what we thought,” said Kiwibank chief economist Jarrod Kerr.

He said he expects the next cash rate move to be a cut.

The economy in the first quarter was hurt by Cyclone Gabrielle and the Auckland flash floods, which caused as much as NZ$14 billion ($8.6 billion) in damage. They reduced farm production, hurt tourism and slowed consumer spending.

However, the data has been volatile of late and a number of economists expect growth to be weak or flat rather than negative.

“Whether or not it’s weak but weakly positive or weak but weakly negative it is still weak and in terms of the momentum of the economy that’ll be what’s important for the Reserve Bank,” said principal economist at Infometrics Brad Olsen.

($1 = 1.6353 New Zealand dollars)