Preview of NZ Q4 GDP

The expectation is 0.2% fall in GDP for the December Quarter, following two quarters of extremely strong growth.

This does not necessarily mark the start of a recession. GDP data has been choppy since Covid, and the details don’t tell a consistent story about whether monetary policy is biting.

Nevertheless, it does show that the economy is coming from a less overheated starting point than the Reserve Bank thought.
We think that will nudge them towards a smaller 25 basis point hike at the April OCR review.

The New Zealand economy went on a tear through the middle part of last year, as the return of overseas tourists lifted GDP by almost 4% over the June and September quarters. Coming off the back of that, we were already bracing for much more subdued growth in December quarter. But the final batch of indicators released last week actually suggest a slight contraction. We now estimate that GDP fell by 0.2% in the December quarter.

The details don’t tell as clean a story as we might like about the Reserve Bank’s efforts to slow the economy. Goods-producing sectors were softer across the board in the December quarter, with retail, wholesaling, manufacturing and construction all likely recording declines. But services sectors are still looking robust – and not just those relating to international tourism, but areas like professional services as well. There’s no obvious reason why tight monetary policy would have such disparate effects.

Expectations are of 25bp hike in April.

The RBNZ’s February projections sat somewhere between a 25 and a 50 basis point hike at the next OCR review on 5 April. Previously we favored a 50 point move, on the basis that the RBNZ’a recent tactic have been to move quickly towards where it thinks the OCR needs to be. But with the likelihood of a much weaker than expected GDP result – and effectively no other major data releases between now and April – we now expect the RBNZ to lean towards a smaller 25 basis point increase.

The April review is not a full Monetary Policy Statement so the RBNZ won’t be publishing new projections anyway. But in February there was a sense that the RBNZ has deferred the question of how high interest rates will need to go until the May review, when they will have a better sense of the inflationary effects of both the cyclone’s impact and the fiscal response.