Almost every sector of the economy shrank during the last quarter, despite record migration and population growth.
New Zealand has officially entered a recession—defined as two successive quarters in which the economy contracts—as GDP fell 0.1 percent in the December 2023 quarter when compared with the September quarter, which also shrank by 0.3 percent.
This comes despite the country experiencing record levels of migration—130,000 in the year to January—and population growth.
It was the fourth quarter of the last five when the economy contracted.
On a per capita basis, GDP decreased by 0.7 percent, while real gross national disposable income fell 1.4 percent. Wholesale interest rates and the New Zealand dollar fell in response to the news.
The decline is due in large part to decisions by the Reserve Bank of New Zealand to continue to increase the official cash rate to slow spending by both households and businesses in an attempt to control inflation.
Too Much Pandemic Stimulus
ANZ Bank’s economists described it as “a policy-induced slowdown” that is “part of the necessary transition from too much fiscal and monetary stimulus [by the then Labour government] in the wake of the pandemic.”
“This is what paying the piper looks like, and if we don’t pay up, the inflation rats will take over the whole economy.”
That was echoed by Westpac senior economist Michael Gordon, who said that while the 3.1 percent that the economy has contracted year-on-year, on a per capita basis, is historically steep, “it highlights the degree to which the economy had become overheated in the first place.”
Almost all parts of the economy experienced a downturn: manufacturing, wholesale and retail trades, accommodation, and the transport, postal, and warehousing sectors all declined sharply during the quarter, according to Statistics NZ data.
Wholesale trade was hit hardest, with the steepest falls in grocery and liquor wholesaling. The retail sector fell across furniture, electrical, and hardware retailing.
GDP Per Person
Graph showing GDP in 2009/10 prices per capita, quarterly and annual growth rates, from January 2018–December 2023.
Economists generally think interest rates are at their peak, but how quickly the Reserve Bank cuts the official cash rate depends entirely on inflation after the National-led government introduced legislation, making that the Bank’s single focus. The Labour government amended the legislation in 2018 to introduce a new secondary objective of achieving maximum sustainable employment.
Mr. Gordon was cautiously optimistic about the effect of the recession on future monetary policy decisions.
“On balance, today’s report suggests slightly less need to keep monetary policy tight for an extended period,” he said. “That said, the scale of the surprise for the Reserve Bank is less than we saw in the September 2023 release, which the Reserve Bank has tended to downplay. There is also a lot of water still to go under the bridge before the May monetary policy statement.”
Cuts to Official Cash Rate Possible This Year: Economists
ASB still expects rate cuts in the second half of this year. Economist Nathaniel Keall said the result provided an even stronger argument for cuts sooner than mid-2025, which the Reserve Bank had signalled.
However, he also said other changes may be required if the country’s economy is to fully recover.
“Headline GDP growth—as unimpressive as it is—actually flatters the picture and masks the underlying weakness,” he said.
“Since mid-2022 the economy has experienced a sizeable deterioration in momentum that has erased most of the initial strength of the early post-COVID recovery,” he explained. “Economists and policymakers need to think seriously about how to boost productivity and get the NZ economy out of the hole it is in, or we will all be the poorer for it.”