New Zealand Economy Falls Into Recession

A devastating cyclone is taking its toll on the country’s agriculture-driven economy, which is entering a recession in the first quarter. Official data released Thursday signaled that gross domestic product, or GDP, contracted 0.1 percent in the first three months of this year, following a revised fall of 0.7 percent at the end of 2022. A technical definition of recession requires two consecutive quarters of negative economic growth. The contraction comes as New Zealand’s interest rates have risen to their highest level in almost 15 years.

The data showed that most sectors saw a slowdown, except for household consumption expenditure, which grew by 2.4%. Business services were the biggest downward driver, falling 3.5%. This included management consulting, advertising, and scientific and engineering design services. The cyclone-related damage to the agriculture, tourism, and transport support services sectors was also a factor, as well as teachers’ strikes which prompted some schools to close.

According to Stats NZ, the decline was more than offset by the rebound in construction, which rose 1.7 percent, reflecting the rebuilding of homes and businesses. The country is still expected to grow by 0.4% in the second quarter and 2% this year, close to its average annual growth rate of 2.2% during the past two decades.

Westpac senior economist Michael Gordon said the figures showed that the economy was losing momentum. “That’s to be expected given the significant increase in interest rates over the last couple of years,” he said. “We need to ensure that we’re not putting ourselves in an even worse position when the interest rates are lowered again.”

The Reserve Bank of New Zealand, which lifted its official cash rate by 525 basis points over the last two years to tame inflation, signaled on Wednesday that it was done hiking for now. The central bank has a history of raising interest rates when the economy has entered a downturn, which it usually manages to avoid turning into a full-blown recession.

New Zealand’s economy is highly export-oriented, and with a global food shortage causing prices to surge worldwide, many farmers need help. The economy also suffers from a surge in house prices and rising wages, making it harder for households to afford living costs.

Center-left finance minister Grant Robertson acknowledged the economy had battered in the year’s first three months. But he insisted that the economic rebound as exports surge, tourism picks up, migration flows are strong, and the government spends on cyclone recovery work. With the election scheduled for October 14, cost-of-living pressures and the economy will likely be critical issues in the campaign. The ruling Labour Party is neck and neck with the opposition National Party in opinion polls. The result could hinge on how much the economy slows in the campaign’s final stretch.