New Zealand sinks into recession, more rate cuts coming

By Wayne Cole

SYDNEY (Reuters) -New Zealand's economy sank into recession in the third quarter as activity dived far more sharply than expected and output in the prior quarter was slashed, a dire result that cements the case for more aggressive rate cuts.

The shock news sent the local dollar to a fresh two-year low of $0.5614, having already shed 2.2% in the wake of a hawkish easing from the U.S. Federal Reserve.

Markets added to wagers the Reserve Bank of New Zealand would slice rates further, having already cut by 125 basis points to 4.25%. Swaps now implied a 70% probability of a 50-basis-point cut in February, and rates were seen declining to 3.0% by the end of 2025.?

Thursday's data showed gross domestic product dived 1.0% in the September quarter from the prior quarter, dwarfing market forecasts of a 0.2% contraction.?

The June quarter was revised to show a fall of 1.1%, and two straight quarters of decline is the technical definition of recession.?Setting aside the pandemic, this was the largest two-quarter decline since the painfully deep downturn of 1991.

"It was dramatically worse than anyone had expected," said Abhijit Surya, an economist at Capital Economics.

"Given the dire state of the economy, we now think risks are tilted towards a larger 75bp cut in February," he added. "We're more convinced than ever that the Bank will cut rates below neutral, eventually to 2.25%."

The outcome was way beyond the 0.2% drop forecast by the RBNZ, and came just two days after New Zealand's Treasury had predicted a fall of only 0.1%.

The government had already had to abandon hopes for a return to budget surpluses, seeing deficits for the next five years.

Finance Minister Nicola Willis on Thursday pointed a finger at the central bank for its role in the economic contraction.

"The decline reflects the impact of high inflation on the economy," she said in a statement. "That led the Reserve Bank to engineer a recession which has stifled growth."

TURNING THE CORNER?

The weakness was spread across industries and particularly sizeable in manufacturing, utilities and construction. Household and government spending dropped in the quarter, while investment and exports also dragged.

For the year to September, output was down a steep 1.5%, the sharpest fall since the pandemic and well outside forecasts of a 0.4% dip.

Since the South Pacific island nation's population grew by 1.2% to 5.35 million in the year to September, GDP per person slid by an even larger 2.1% for the year.

The picture was complicated by substantial revisions from the statistics bureau, which revised up GDP growth over the two fiscal years to March 2024 by almost 2 percentage points.

That made the starting point for this year stronger than first thought. It also erased a recession and a long period of stagnant growth that had contributed to the fall of the former Labour government.

Analysts were still clinging to hope the worst was over for the economy, given the RBNZ had cut borrowing costs by a full percentage point this quarter.

An ANZ survey of businesses out Thursday showed a further recovery in activity in December, while confidence held near historic highs.

"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," said Sharon Zollner, head of New Zealand economics at ANZ.

"The bar for things to improve from here is clearly pretty low."

(Reporting by Wayne Cole; Editing by Jamie Freed)