Statistics NZ’s gross domestic product data was a win for the Reserve Bank’s forecasting team which picked the quarterly change exactly right.
The economy grew 0.2% during the first three months of the year, and flipped the symbol in front of the annual number from minus to a plus — also at 0.2% year-on-year.
While this can be framed as New Zealand exiting recession and returning to growth, it would be better described as the economy flatlining as the central bank suppresses demand.
If the Reserve Bank’s future forecasts play out, the next quarter will also see near-zero growth and the annual number will switch back to negative.
High frequency data actually suggests the June quarter, which ends next week, will record a contraction. BNZ’s economists lowered their forecast to -0.2% after Thursday’s release.
“Overall, we see today’s data as showing the economy continuing to bounce along the bottom,” they wrote in a note.
It is not until the September quarter that gross domestic product (GDP) really begins to grow again, slowly approaching the long-run average of 2.6% at some point in late 2025.
Long story short: the Reserve Bank has shrunk the real economy by about 0.6% from its peak in September 2022 and won’t let it return to that level until the end of this year.
Receding still
New Zealand’s economy is at the bottom of a wide U-shape GDP recession. While it may have passed the lowest point, the slope ahead is still shallow and treacherous.
Debates about whether households are experiencing something they would call a recession shouldn’t be decided by a few decimal points in a quarterly GDP release.
The unemployment rate is currently 4.3% and is forecast to rise above 5% in the next year, but rising joblessness already triggered an NZ version of the Sahm Rule back in September 2023.
Miles Workman, a senior economist at ANZ, said the data showed the economy was still “anaemic” from a domestic demand and per capita perspective.
Economic activity per person has fallen 4.3% in total, making it worse than during the 4.2% decline during the Global Financial Crisis.
“While GDP growth is expected to start gradually recovering later this year, most households won’t feel it, given the domestic slowdown still has further to run and the labour market is loosening,” he said.
There yet?
This disgusting medicine is just what the doctor ordered. Core inflation was still hot at 4.3% in March and the Reserve Bank wants an ice-cold economy to cool it down.
In a speech, Reserve Bank chief economist Paul Conway said spare economic capacity would emerge over the year and feed through to lower domestically generated inflation fairly quickly.
The Reserve Bank’s forecasts showed the output gap, the difference between actual and potential economic activity, would turn negative for the first time during the March quarter.
This gap was forecast to be -0.3% of GDP in March and growing to -1.6% over the next four quarters. This would be what might be described as a “cool” rather than “hot” economy.
Cooler conditions will help to spread disinflation into the sectors which have been slower to respond to interest rates, such as the services sector.
Services only declined 0.1% during March and was up 1% on an annual basis. That said, wholesale trade can be a bellwether and it has declined 3.6% over the past year.
Reserve Bank policymakers will want to maintain the economic conditions seen in the March quarter until they can be completely sure inflation is dead and buried.
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