New Zealand Suffers Deeper-Than-Expected Recession; Kiwi Drops

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(Bloomberg) -- New Zealand’s economy suffered a deeper-than-expected recession in the second and third quarters as high interest rates curbed demand. The local dollar fell to a two-year low.

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Gross domestic product declined 1.0% in the three months through September, Statistics New Zealand said Thursday in Wellington. Economists expected a 0.2% contraction. In the second quarter, GDP shrank a revised 1.1% compared to an initially reported 0.2% drop.

A previous recession was revised away and the economy is forecast to recover over 2025 now that the Reserve Bank, having tamed inflation, has started to lower its Official Cash Rate. But the GDP data are much worse than any forecasters expected, including the RBNZ, prompting investors to increase bets on deeper rate cuts.

“Today’s GDP figures delivered a significant downside surprise that’s likely to see a rethink by the RBNZ on how low the OCR will need to go this cycle,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland. “The risk that the OCR will end up lower than our current forecast of a 3.5% trough has clearly risen.”

The New Zealand dollar fell more than a quarter of a US cent after the report to as low as 56.13 cents. The currency has slumped more than 11% this quarter, the worst performer among major developed market peers, reflecting an expected divergence between New Zealand and US policy rates next year and concerns over Chinese growth.

The yield on policy-sensitive two-year bonds dropped seven basis points to 3.69%.

GDP Revisions

GDP fell 1.5% in the third quarter from the year-earlier quarter, more than three times the expected 0.4% decline.

Statistics New Zealand made a range of adjustments to the GDP series, revising up earlier out-turns so that a previously reported recession in the six months through March 2023 is no longer recorded.

“While the June quarter growth rate has been revised downward, the overall level of economic activity has been revised upward over a longer period,” the agency said.

Still, high interest rates have pushed the manufacturing and service sectors into extended downturns, unemployment is rising and house prices are falling.

Further cooling activity, population growth is slowing as fewer immigrants arrive and more New Zealanders leave the country in pursuit of better jobs and wages abroad.

The RBNZ began cutting rates in August and stepped up the pace with 50 basis-point reductions in both October and November, taking the OCR to 4.25%. It has said a third reduction of that magnitude is likely at its next decision in February.