New Zealand’s economy contracted sharply in the third quarter of 2024, with GDP plummeting by 1.0% compared to the previous quarter, according to government data.
This contraction dwarfed market expectations of a modest 0.2% decline.
Combined with a revised 1.1% drop in Q2, the economy has met the technical definition of a recession, marking its steepest two-quarter decline since the 1991 downturn, excluding pandemic-era disruptions.
The surprising scale of the contraction is fuelling concerns about the country’s near-term economic outlook and global standing.
The dismal data has prompted speculation of more aggressive monetary easing by the Reserve Bank of New Zealand (RBNZ).
The local dollar plunged to a two-year low of $0.5614 following the announcement, reflecting concerns over the nation’s economic trajectory.
Swaps now suggest a 70% likelihood of a 50-basis-point cut at the RBNZ’s next meeting in February, with interest rates forecasted to drop to 3.0% by the end of 2025.
RBNZ under pressure as economy falters
The RBNZ has already slashed interest rates by 125 basis points this year, bringing them to 4.25%, yet the worsening economic data adds pressure for further reductions.
Economists are now considering the possibility of a larger 75-basis-point cut in February, with rates potentially falling below neutral to 2.25%.
These dramatic rate cuts highlight the RBNZ’s struggle to balance inflation control with the need to stimulate growth in an increasingly fragile economy.
The sharp contraction caught policymakers off guard.
Just days earlier, New Zealand’s Treasury had forecasted a mild 0.1% decline for Q3, significantly underestimating the scale of the downturn.
Finance Minister Nicola Willis criticised the central bank’s handling of monetary policy, highlighting the detrimental effects of its inflation-control measures on economic growth.
“The decline reflects the impact of high inflation on the economy,” said Willis, acknowledging the central bank’s role in engineering the recession.
The minister also noted that further revisions to fiscal projections may be necessary to account for weaker-than-expected revenue.
Fiscal and economic challenges deepen
The economic slump has derailed government plans for fiscal recovery, with budget deficits now projected to persist for the next five years.
This grim fiscal outlook compounds the challenges faced by policymakers as they navigate a weak global environment and subdued domestic demand.
Analysts caution that failure to address these fiscal and structural issues could lead to prolonged economic stagnation.
Thursday’s report underscores the fragility of New Zealand’s economy as it grapples with the dual pressures of high inflation and a hawkish US Federal Reserve.
The latter has maintained a tighter monetary stance, further weighing on the Kiwi dollar and global market sentiment.
Economists warn that New Zealand’s downturn could deepen without decisive policy action.
While rate cuts may offer temporary relief, structural reforms and fiscal measures will be crucial to reviving growth and stabilising the economy in the long term.
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