By Christina Leung, Principal Economist for the New Zealand Institute of Economic Research
The release of March quarter GDP showing a 0.1 percent decline in economic activity over the first quarter of this year meant the New Zealand economy is in a ‘technical recession’.
While there is no universal or official definition of a recession, an often-used one is two consecutive quarters of decline in GDP. This latest GDP result follows the 0.7 percent decline in the December 2022 quarter.
For the March quarter, the slight decline in GDP was driven by weaker spending on household goods, reduced residential investment and lower export volumes. There is the potential for this small decline in GDP to be revised away in the future as more timely information becomes available to Stats NZ. Nonetheless, regardless of whether New Zealand is in a recession or not, there are clear signs of slowing momentum in the economy.
Households feeling more cautious
This slowing is becoming particularly apparent in the household sector. Although the labour market remains tight, there are early signs of an easing in hiring demand and employment confidence surveys point to weaker confidence about job prospects. Firms report an easing in labour shortages, which we expect will flow through to slower wage growth over the coming years.
For many households grappling with the rise in living costs, softer wage growth will stoke further concerns about the deterioration in purchasing power in the high-inflation environment. The removal of fuel and public transport subsidies from July will increase transport costs for many households. Meanwhile, many households face significantly higher mortgage repayments as their fixed-term mortgage rates come up for repricing. RBNZ data shows around half of mortgages are due for repricing over the coming twelve months. We expect the increase in mortgage repayments will drive increased caution amongst many households and reduce discretionary spending. Weaker household spending should flow through to a broader slowing in economic activity over the coming years.
Reserve Bank signals peak in the OCR
The slowing momentum in the New Zealand economy is supporting an easing in inflation pressures. The increase in interest rates is finally starting to dampen demand as the RBNZ intended. Meanwhile, on the supply side, constraints are easing as the reopening of international borders allows more firms to bring in workers from overseas. This combination of weaker demand and increased supply of labour and materials has seen inflation turn, with annual CPI falling from 7.3 percent in June 2022 to 6.7 percent in March 2023.
Although annual CPI is still above the RBNZ’s 1 to 3 percent target band, these recent developments appear to have provided the central bank with enough confidence that the OCR increases it has undertaken to date will be enough to bring inflation back towards its target band. The Reserve Bank indicated in its May Monetary Policy Statement that it did not expect to increase the OCR further this cycle. We also expect the OCR to have peaked at 5.5 percent as higher interest rates continue to dampen demand and reduce inflation in the New Zealand economy over the coming years.