New Zealand enters second recession as GDP shrinks 0.3% unexpectedly

New Zealand has been hit by an unexpected downturn in its economy, as the latest data reveals a contraction of 0.1% in the fourth quarter of last year, following a 0.3% decline in the previous three months.

This downturn confirms the country's entry into a second consecutive recession, catching economists off guard as they had anticipated a modest growth of 0.1%. The year-on-year comparison showed an even steeper decline, with GDP shrinking by 0.3%, contrary to earlier expectations of no growth.

The recession comes amidst the backdrop of the Reserve Bank of New Zealand's (RBNZ) stringent monetary policies aimed at curbing inflation. Despite holding the Official Cash Rate at 5.5% since May, and indicating no plans for rate cuts until 2025, the economy has struggled to maintain growth momentum.

Now, with the unexpected contraction, pressure is mounting on policymakers to reassess their stance and possibly consider earlier rate cuts.

Economists like Nathaniel Keall from ASB Bank in Auckland are now predicting rate cuts as early as the second half of 2024, a significant shift from previous expectations. Market reactions to the news were swift, with bond yields dropping and the New Zealand dollar initially weakening against the US dollar, before stabilizing later in the day.

The situation in New Zealand contrasts with the outlook in other major economies. While the Federal Reserve in the United States is maintaining its projection for rate hikes, the Reserve Bank of Australia has abandoned its tightening bias. This global context adds further complexity to New Zealand's economic decision-making.

Looking ahead, there's a growing consensus among economists for the possibility of the first rate cut later in 2024, despite earlier forecasts suggesting stagnant or positive growth. The contraction in GDP was primarily driven by declines in manufacturing, retail, and machinery sales, according to the statistics agency. Additionally, GDP per capita recorded its fifth consecutive quarterly decline, indicating broader economic challenges beyond just headline GDP figures.