New Zealand’s GDP fell by 0.6% in the December quarter, and the economy’s momentum has slowed by even more than the headline figures suggests
- Quarterly change: -0.6% (last: +1.7%, Westpac f/c: -0.2%, market f/c: -0.2%)
- Annual change: +2.2% (Last +6.4%)
- Annual average change: +2.4% (Last: +2.7%)
The New Zealand economy’s strong run through the middle part of 2022 was punctured at the end of the year. GDP fell by 0.6% in the December quarter, weaker than market forecasts of a fall of around 0.2%, and much weaker than the Reserve Bank’s assumption of a 0.7% rise.
In fact the result was even softer than the headline number shows. Stats NZ has updated the way that it calculates the seasonal factors – a thorny issue in recent times, as the Covid pandemic and the border closure in particular has thrown off the usual seasonal patterns in activity. Today’s result would have been a 1.2% decline using the old seasonal factors (as we did in our forecasts). Or to look at it another way, annual growth of 2.2% is a full percentage point lower than what we expected, and almost 2ppts lower than what the RBNZ was expecting.
The weakness was more broad-based than we expected, with declines in both the goods and services sectors. The biggest drag on activity was in manufacturing, down by 1.9%. Retail and accommodation, transport, and arts and recreation – all sectors that would have benefited from the return of overseas tourists – were also down overall, highlighting the degree of softening in domestic demand.
While the economy is widely expected to slip into recession as higher interest rates bite, we suspect that the December quarter results represent more of an air-pocket in our descent, rather than an earlier and harder than expected landing. Higher-frequency data has actually improved a little in the first two months of this year, and the clean-up from Cyclone Gabrielle will generate extra activity in the coming months that will add to measured GDP.
The crucial thing for the RBNZ, though, is that the starting point for the economy is substantially less stretched than they thought. And that matters for how much of a slowdown is needed to bring inflation back under control.
