Cyclone-Battered New Zealand Slips Into Recession, Facing 'Awkward' Outlook

After the COVID-19 pandemic, New Zealand emerged as a global trendsetter in raising interest rates to combat the inflation wave. Now it has officially slid into recession in a likely harbinger of what lies ahead for others.

New Zealand's economy has officially slipped into recession, for the first time since 2020.

According to Stats NZ, the nation's official number cruncher, its gross domestic product (GDP), the universal measure of economic growth, contracted 0.1% in the first three months of the year.

This is the second quarter in a row of negative economic growth, following the previous quarter's revised fall of 0.7%, which matches the definition of a technical recession.

Most parts of the New Zealand economy either slowed down or shrank, offsetting a slight rise in construction. The decline was most apparent in services, exports and agriculture (forestry and fishing included), with business services acting as the biggest downwards driver by falling 3.5 percent, Stats NZ said.

As per the nation's statistician, the fall in business services itself was driven by management consulting, advertising, scientific, and engineering design.

The economic downturn was also affected by the initial impact of twin cyclones Hale and Gabrielle, which together ranked among the worst in the country's living history and left a massive amount of damage and clean-up work to be done.

"The adverse weather events caused by the cyclones contributed to falls in horticulture and transport support services, as well as disrupted education services," Stats NZ said in a statement.

Last but not least, the economic downturn was spurred by the teachers' strikes, impacting the entire country.

Meanwhile, inflation in New Zealand is currently tracking at 6.7 %, well above the central bank's target band of 1-3%.

Overview and Future Outlook

The last time New Zealand's economy dipped into technical recession was in 2020, when the island nation's overall economic activity slowed amid the COVID-19 pandemic along with its ensuing lockdowns and border closures. That recession, however, was short-lived as activity rebounded once these restrictions were eased.

Kiwibank, one of the country's largest banks with a market share of some 10%, said the result didn't yield any surprises and suggested further contractions in the year ahead, noting that the outlook was "awkward, to put it mildly."

That said, the current recession has emerged in the midst of shrinking household consumption and low business confidence.

"Demand is being weighted down by rising interest rates. If households spend less, which is what we are seeing, then the economy will contract harder. If businesses pull back on their hiring and investment, which is what we're hearing, then the economy will contract harder," Kiwibank chief economist Jarrod Kerr told local media.

Meanwhile, the International Monetary Fund (IMF) said New Zealand's economy was "in the midst of a necessary, policy-induced slowdown following the strong post-pandemic recovery." It also warned against the central bank turning to monetary policy easing measures and urging it to leave the door open for more rate hikes ahead.

Last month, the Reserve Bank of New Zealand (RBNZ), the country's central bank, signalled it had ended its tightening cycle, seen as its most aggressive in the 21st century.

New Zealand led the world in raising interest rates to tackle the post-pandemic wave of inflation. Its current recession may offer a clue as to what lies ahead for others that followed suit.