Christina Leung, Principal Economist and Head of the Auckland Office, NZIER
The latest Gross Domestic Product (GDP) release by Stats NZ indicated New Zealand economic activity contracted by 0.2% in the first quarter of this year. This decline in the March quarter GDP has increased discussion of whether the New Zealand economy is headed for (or is already in) a recession. While there are many definitions of recessions, the most commonly used one is where the economy has faced two consecutive quarters of a decline in GDP.
COVID-19 effects apparent
In assessing whether the March quarter GDP outturn heralds the start of a recession in New Zealand, we consider what this decline captured. Despite the relaxation of lockdown and social distancing restrictions in December, the surge in the number of COVID-19 cases over the March quarter meant activity was still disrupted as people stayed at home as a result of infection or self-isolation. This had a particularly negative impact on the services sector, with many eateries and retail outlets either closing temporarily or reducing their operating hours given acute staff shortages. These disruptions have lessened as the COVID wave has eased (to a very long tail), which should have supported a recovery in activity in the June quarter.
Growing headwinds for households
Nonetheless, there are clearly headwinds facing the household sector. The latest Westpac McDermott Miller Consumer Confidence Index shows households are feeling even more downbeat than during the recession in the early 1990s and the Global Financial Crisis in 2008. Higher mortgage rates and living costs are weighing on household sentiment. Since October 2021, the Reserve Bank of New Zealand has increased the Official Cash Rate (OCR) from 0.25% to 2%, and has indicated further OCR increases over the coming year. This is driving up mortgage rates across the curve, with many borrowers likely to be rolling off record low fixed mortgage rates of just over 2% onto fixed mortgage rates of around 4-5% over the coming year. For those with large mortgages, this will mean a steep increase in mortgage repayments. The surge in global crude oil prices has also pushed up the price of petrol at the pump to over $3 per litre in many areas. These developments will be putting a dent in many household wallets.
However, the improvement in household incomes, as continued labour market tightness underpin wage growth, should provide some buffer to these headwinds. This is reflected in the continued decline in the measure of household debt servicing as a proportion of nominal disposable income. Although household debt levels and mortgage rates have increased over the past year, the rise in household incomes is supporting the servicing of these mortgages.
Highly uncertain outlook
There is a high degree of uncertainty over whether New Zealand will face a recession over the coming year. The ongoing war in Ukraine and impact of the surge in crude oil prices on the major economies adds another layer of uncertainty to the domestic growth outlook. We expect that households will pare back on discretionary spending in the face of higher mortgage repayments and living costs. This should drive a slowing in retail spending and economic activity more broadly. While we acknowledge the risk of a recession, we believe a continued solid labour market will support resilience in the New Zealand economy.