New Zealand’s economy is already halfway into recession following a 0.6% contraction in gross domestic product (GDP) over the December quarter.
The contraction was significantly worse than the Reserve Bank’s 0.7% GDP growth forecast and worse than what the majority of bank economists had projected.
The Reserve Bank’s shock 0.5% interest rate hike on Wednesday has lifted New Zealand’s official cash rate to 5.25%, which is the largest increase in the developed world:
The latest hike was delivered despite half of New Zealand’s mortgage book this year switching from ultra cheap fixed rates to variable rates that are double to triple current levels.
Consumer confidence is also tracking at record lows with households especially pessimistic on the outlook for the economy and household finances:
The combination of rising interest rates and the fixed rate mortgage reset means monetary conditions across New Zealand will tighten sharply in the months ahead, which will crunch household consumption and ensure the economy plunges into recession.
Indeed, NZIER’s latest quarterly survey of business opinion pointed to an economy that is spluttering.
For the first time since June 2021, businesses reported weakening demand as being the primary constraint on their business and not labour shortages.
Over half of firms surveyed also reported a decrease in their profits over the March quarter.
These survey results should surprise nobody given Westpac’s latest confidence survey showed “the number of households who think it’s a good time to make a major purchase is languishing close to record lows”, suggesting consumer demand is collapsing:
Westpac noted that “confidence remains around the sorts of levels that we saw during the recession in the early-1990s and again during the Global Financial Crisis in 2008/09”.
When viewed in light of the Reserve Bank’s latest shock rate hike, a severe recession is now looking inevitable for New Zealand.
