Recession ahead of schedule

Three months ago I picked that New Zealand was already in a recession – six months ahead of the Reserve Bank’s expectation. It has now been confirmed that, with a slight 0.1% decline in March, New Zealand is in a technical recession at present.

The March quarter decline has been driven by:

  • Primary industries – cyclones and squeezed farm budgets don’t make great business.
  • Goods producing industries – less manufacturing activity.
  • Service industries – business services led the decline.

Given how population growth soared over the quarter, as the migration boom took flight, the GDP result in per capita terms looks even more dire – with a 0.7% plunge within the quarter.

This result is adds weight to the Reserve Bank’s current monetary position that it has ended interest rate hikes this tightening cycle. With other evidence showing that consumer spending has sharply declined since March, we are now waiting to see how pricing behaviour by businesses and inflation data reacts. If inflation expectations and actual inflation itself (particularly non-tradeables) show further signs of cooling then we can be more certain that another rate hike later in the year is off the table, and the prospect of cuts in the official cash rate by mid next year can’t be ruled out if economic conditions deteriorate.

The big unknown at this stage will remain migration – a couple of months ago net migration looked on track to crack 100,000 people over 12 months, while now it has moderated to closer to 70,000 people per annum. That is still a lot of people – usually in the short run you would worry about the inflationary pressures these people would add as they set themselves up in a new country and add to consumption, but given the way consumer spending has weakened that extra pressure is now less of a concern. Over the medium term, the extra workforce capacity these people enable will be a welcome boost for New Zealand businesses and will help prevent capacity constraints from creating inflationary pressures as they did over the past couple of years.