New Zealand’s economy dips into recession as higher interest rates bite

The nation’s Gross Domestic Product fell by 0.1% in the March quarter, following a revised 0.7% fall in the previous quarter.

Updated - June 15, 2023 05:01 pm IST

Published - June 15, 2023 04:56 pm IST - WELLINGTON

The interest rates in New Zealand are at their highest level since 2008, which makes it more expensive for people to borrow money for homes, cars and other purchases. File photo used for representational purposes.

The interest rates in New Zealand are at their highest level since 2008, which makes it more expensive for people to borrow money for homes, cars and other purchases. File photo used for representational purposes. | Photo Credit: AP

New figures released on June 15 show that New Zealand’s economy has dipped into recession, as higher interest rates take their toll.

According to Statistics New Zealand (SNZ), the country‘s public service department, the Gross Domestic Product fell by 0.1% in the March quarter, following a revised 0.7% fall in the previous quarter.

That fulfils the nation's definition of a recession, which is at least two consecutive quarters of negative growth.

The slowdown comes after New Zealand’s central bank raised its benchmark interest rate 12 times straight to 5.5% in a bid to tame inflation. The rate is currently at its highest level since 2008, which makes it more expensive for people to borrow money for homes, cars and other purchases. The Reserve Bank of New Zealand has indicated that it doesn’t plan to raise the rate any further for now and that its next move will be a cut.

The downturn in growth was in line with economists’ expectations, and the currency was little changed, with one New Zealand dollar trading at around 62 U.S. cents.

Taken over the full year, the picture looked rosier. New Zealand’s economy grew by 2.9% after strong growth in the first two quarters. And with such a small dip in the March quarter, it’s possible the recession call could be reversed when the latest figures are revised next quarter.

Contributing to the drop in growth were a series of deadly weather events, including flooding in Auckland and a cyclone.

“The adverse weather and resulting flooding caused significant damage and disruption, particularly across the North Island,” SNZ wrote in a release.

The biggest drivers of the downturn were business services, which fell 3.5%, and transport, postal and warehousing, down 2.2%. Going against the trend, media and telecommunications rose 2.7%.

One of the most notable effects of higher interest rates has been felt by the housing market. Since having peaked 18 months ago, average house prices in New Zealand have fallen by about 18%. However, there are signs the market might have reached its lowest point. Statistics released on June 15 showed that prices were flat when compared with the previous month and that sales volumes were rising in some areas.

According to Kiwibank economists Jarrod Kerr and Mary Jo Vergara, New Zealand’s central bank had raised rates too high and the economy could be expected to contract more over the year ahead.

“If households spend less, which is what we are seeing, then the economy will contract harder,” they wrote in an analysis. “If businesses pull back on their hiring and investment, which is what we’re hearing, then the economy will contract harder.”

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