New Zealand's Economy Contracts, Entering Recession as Rate-Cut Bets Rise

NEW ZEALAND ECONOMY: New Zealand's economy unexpectedly contracted in the last quarter of the previous year, officially marking a recession and prompting a decline in the currency amid increased speculation of interest rate cuts. Government data from Wellington revealed a 0.1% drop in Gross Domestic Product (GDP) for the fourth quarter, following a 0.3% decline in the preceding three months, defying economists' expectations of 0.1% growth.

Confirmation of Recession

The latest figures depict a 0.3% shrinkage in GDP compared to the same period in the previous year, a worse outcome than the forecasted zero growth. The economy slipping into a double-dip recession aligns with the Reserve Bank of New Zealand's (RBNZ) strong efforts to tighten monetary policy to control inflation. This economic fragility is expected to increase the pressure on policymakers to consider interest-rate cuts sooner than previously expected.

Policy Tightening and Rate-Cut Speculations

The RBNZ has maintained the Official Cash Rate at 5.5% since May, with indications last month suggesting no rate reductions until 2025, citing factors such as high immigration rates and persistent core inflation. However, the unexpected GDP decline has shifted expectations, with economists like Nathaniel Keall from ASB Bank predicting rate cuts from the latter half of 2024.

Market Reaction and Currency Impact

Following the release of the report, expectations for rate cuts surged, reflected in the decline of the yield on two-year bonds sensitive to policy changes. Concurrently, the New Zealand dollar initially depreciated, extending its year-to-date decline to 4%, before rebounding slightly as the US dollar weakened, trading at 60.88 US cents.

International Context and Policy Considerations

Pressure mounts on New Zealand amid the Federal Reserve's stance on potential rate reductions this year and the Reserve Bank of Australia's recent abandonment of its tightening bias. RBNZ Chief Economist Paul Conway hinted at the possibility of earlier rate cuts if the Federal Reserve eases later in the year. Additionally, the International Monetary Fund has suggested scope for OCR rate cuts in New Zealand later in the year.

Economists' and Central Bank Expectations

Despite the surprise contraction, only four out of 16 economists surveyed by Bloomberg had anticipated such a downturn, while the RBNZ itself had projected no change in GDP for the quarter. Most economists now foresee the likelihood of the first OCR cut occurring in the final months of 2024.

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Sectoral Analysis and GDP Per Capita

The decline in GDP was primarily driven by contractions in manufacturing, retail, and machinery sales, according to the statistics agency. Additionally, GDP per capita witnessed a 0.7% decrease from the preceding quarter, marking its fifth consecutive quarterly decline.

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New Zealand's unexpected economic contraction signals a challenging phase ahead, prompting speculation of earlier-than-expected interest-rate cuts to stimulate economic recovery. As policymakers reassess monetary strategies in response to the recession, the nation navigates through a complex economic landscape amidst global economic shifts and internal challenges.