The central bank and treasury had both forecast the country would enter a shallow recession in the second quarter of 2023. Economists said the weak data released on Thursday meant it was possible the country was already in recession, particularly given the impact that severe weather in January and February was likely to have on the economy. "The outlook for Q1 remains gloomy," Capital Economics said in a note.
New Zealand spent two quarters in recession in 2020 because
of tight restrictions when the COVID-19 pandemic hit, but prior
to that the economy had not contracted since late 2010.
Regardless of whether the country is entering a recession, the economy is much less overheated than the Reserve Bank of New Zealand (RBNZ) had expected.
The central bank has undertaken its most aggressive policy tightening since 1999, when the official cash rate was introduced, lifting it by 450 basis points since October 2021 to 4.75%.
The market is betting the RBNZ's plan to hike the official cash rate (OCR) by a further 75 basis points this year to 5.5% by the third quarter will be pared back. "We see no need for the RBNZ to go to 5.50%, which would risk causing unnecessary losses in activity and employment," Citi analysts said in a note, predicting GDP contractions in the first and second quarter. NZ bank bill futures have surged as the market priced in a lower peak for RBNZ rates. The market is now 50-50 on whether the RBNZ hikes 25 basis points (bps) in April, while the terminal rate is seen at 5.11% rather than the bank's projection of 5.5%. The New Zealand dollar was down before the data but extended the fall to be off 0.6% at $0.6145. Two-year swaps are near a two-month low of 4.925% having fallen sharply overnight as bank sector concerns drove down bond yields globally.
ASB Bank said in a note that the data weakness and increased financial market jitters overseas suggested less urgency for RBNZ rate hikes. "Uncertainty is elevated, but we have shaded down our 50 basis point April OCR call to a 25 basis point hike," the note said. (Reporting by Lucy Craymer; Editing by David Gregorio, Stephen Coates and Jamie Freed)
