Key Facts

  • The New Zealand economy is slowing down faster than expected due to high interest rates, as shown by recent data from Statistics NZ.
  • Recent GDP data indicated a 0.3% decrease in economic activity during the September quarter, contrary to the expected 0.2% increase predicted by most market experts.
  • While the services sector grew by 0.4%, weakness in the physical economy offset this growth, with goods producing industries down by 2.6%, wholesale trade down 1.9%, retail declining 0.2%, and transport dropping 4.5%.
  • The NZ dollar and wholesale interest rates fell following the GDP data release, shocking many market professionals.
  • The banking and financial services industry opined that the latest GDP data challenged the Reserve Bank’s stance of a resilient economy.
  • The annual GDP growth was revised to 1.3%, and annual growth per capita was adjusted to a negative 0.3% indicating a technical recession.
  • Household expenditure fell by 0.6% in the September quarter, with spending on durable goods dropping to its lowest level since the pandemic lockdown.
  • Analysts suggested that, given the gloomier trend, next year’s inflation rate might allow the central bank to assess the impacts of migration without needing to immediately adjust rates.
  • Since October 2021, the Reserve Bank has raised the Official Cash Rate by 525 basis points to 5.50% and hinted at another possible increase next year.

Article Summary

New Zealand’s economy is decelerating at a rate faster than what forecasters had anticipated, primarily due to the knock-on effects of high interest rates. Statistics NZ’s latest GDP data revealed a 0.3% decrease in economic activity for the September quarter, taking markets by surprise. Despite growth in the services sector, a significant downturn in the physical economy such as a 2.6% decline in goods producing industries has countered the positive sector’s performance.

Following the unexpected GDP data, the NZ dollar and wholesale interest rates took a hit. The GDP figures cast doubt on the Reserve Bank’s assessment of a resilient demand within the economy. The situation has exacerbated with the technical recession tag coming back into play due to a revision of the annual GDP growth to 1.3% and annual growth per capita to negative 0.3%.

Additionally, a 0.6% fall in household expenditures during the September quarter reflects the overall weakened economy at the individual level. Analysts suggest that this economic cooling and the somewhat effective monetary policy should not be viewed as a green light for a rate cut, given the ongoing concerns around inflation.

The Reserve Bank had previously increased the Official Cash Rate by 525 basis points since October 2021 to 5.50%, indicating potential for another increase next year. However, if the inflation rate aligns with the softer trend early next year, it might provide the central bank some breathing room to evaluate the effects of migration before adjusting rates again.

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