The agriculture-rich economy of New Zealand has unexpectedly contracted in the third quarter, leading to concerns about whether interest rates have risen too far. This contraction has raised questions about the possibility of the economy returning to a recession.
Contractions in Economy
According to figures released by Stats NZ on Thursday, the economy contracted by 0.3% in the third quarter, following a revised 0.5% increase in GDP in the second quarter. This unexpected decline has surprised economists, as they had forecasted a 0.2% growth for the quarter. Stat NZ also added that from a year earlier, the economy contracted by 0.6%.
Possible Impact on Interest Rates
Kieran Davies, chief macro strategist at Coolabah Capital, noted that the data suggests New Zealand may be the only advanced economy experiencing a recession. Davies believes this condition will likely prompt the Reserve Bank of New Zealand (RBNZ) to cut interest rates much sooner than previously anticipated in late 2025.
Decline in Household Spending
Household spending, an important economic indicator, decreased by 0.6% in the third quarter, as reported by Stats NZ. This decline was observed across all spending categories, primarily led by a decrease in spending on durable goods.
Explanation for Drop in Household Spending
Stats NZ stated that the drop in household spending is likely connected to changes in fees and rebates for motor vehicles that were introduced on July 1.
It is vital to closely monitor the situation as further developments may impact the trajectory of New Zealand's economy and its interest rates.
Economic Slowdown in New Zealand Prompts Concerns over Inflation
The Reserve Bank of New Zealand's decision to maintain the cash rate at its last policy meeting has ignited concerns about inflation levels. The central bank expressed its worry about persistently high inflation and suggested the possibility of further tightening measures if inflationary pressures persist.
Notably, the Reserve Bank of New Zealand's hawkish stance caught economists off-guard. Analyzing the situation, senior economist at Westpac, Darren Gibbs, commented, "The data reflects an economy that is regressing."
Furthermore, upon reviewing the third-quarter data, it was discovered that the overall size of the economy is significantly smaller than previously estimated by the RBNZ. In fact, it is a substantial 1.8% lower. Gibbs emphasized that this revision will lead the Reserve Bank of New Zealand to lower its estimation of inflation pressure during that period and consequently decrease the likelihood of a rate hike.
The economic slowdown witnessed in the third quarter is widespread, affecting all goods-producing industries. The manufacturing sector experienced a notable decline, leading the way for other industries. Additionally, the transport, postal, and warehousing industry suffered a setback due to a decrease in exported goods during the quarter.
However, despite these setbacks, most service industries experienced growth during the third quarter. Particularly, healthcare and social assistance witnessed significant expansion.
In conclusion, the economic slowdown in New Zealand has raised concerns about inflationary pressures. The Reserve Bank of New Zealand will be closely monitoring the situation to determine whether further policy tightening measures are necessary to address these challenges.