New Zealand’s economy has officially entered a recession, with GDP plunging far more sharply than anticipated in the third quarter of 2024. The news, released on Thursday, highlights a grim economic outlook, prompting speculation of more aggressive rate cuts by the Reserve Bank of New Zealand (RBNZ) to counteract the downturn.
Recession Confirmed: Sharp GDP Declines
Economic data revealed a 1.0% contraction in GDP for the September quarter, significantly worse than market forecasts of a 0.2% decline. This comes on the heels of the revised June quarter showing a 1.1% contraction, meeting the technical definition of a recession—two consecutive quarters of negative growth. Apart from the pandemic’s economic impact, this marks the steepest two-quarter decline since the 1991 recession.
For the year leading up to September, output fell 1.5%, the largest annual drop since COVID-19 lockdowns. When adjusted for population growth, GDP per person plunged 2.1%, further underscoring the depth of the economic challenges.
Currency Weakens Amid Rate Cut Expectations
The unsettling economic outlook sent the New Zealand dollar to a two-year low of $0.5614. The currency had already been under pressure, losing 2.2% earlier due to a hawkish stance from the U.S. Federal Reserve.
Markets are now pricing in a 70% probability of a 50-basis-point rate cut by the RBNZ in February 2025, with further reductions expected throughout the year. Analysts predict rates could drop to 3.0% by the end of 2025, down from the current 4.25%. Some experts, including Abhijit Surya of Capital Economics, believe that rates could fall as low as 2.25% to revive the struggling economy.
Government and Central Bank Under Pressure
Finance Minister Nicola Willis attributed the recession to the combined effects of high inflation and the RBNZ’s aggressive monetary tightening. In a statement, she said:
“The decline reflects the impact of high inflation on the economy. That led the Reserve Bank to engineer a recession which has stifled growth.”
The government has already abandoned its goal of returning to budget surpluses, with deficits now forecasted for the next five years. The bleak economic conditions are testing the government’s ability to balance fiscal responsibility with the need for economic stimulus.
Broad-Based Weakness Across Industries
The recession’s impact is being felt across multiple sectors. Manufacturing, utilities, and construction saw significant declines, while household and government spending also contracted during the quarter. Additionally, investment and exports contributed to the downturn, painting a dire picture for the broader economy.
Signs of Hope?
Despite the grim figures, some analysts believe the worst might be over. The RBNZ has already cut borrowing costs by a full percentage point this quarter, and there are signs of modest recovery in business activity. ANZ’s business survey for December showed improved activity and resilience in business confidence.
Sharon Zollner, head of New Zealand economics at ANZ, noted: “The survey showed more signs of demand recovering, with the first decent lift we’ve seen in past activity, which is the best GDP indicator in the survey. The bar for things to improve from here is clearly pretty low.”
Looking Ahead
While the latest data points to a challenging road ahead, policymakers and analysts are optimistic that rate cuts and fiscal measures could eventually stabilize the economy. However, with the global economic outlook still facing uncertainties, New Zealand’s recovery may depend on both domestic policy responses and external conditions.
For now, the focus remains on the February 2025 RBNZ rate decision, which could provide a clearer indication of the central bank’s strategy to navigate one of the most significant economic downturns in decades.
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