New Zealand economy shrinks in Q4 as rate hikes, high inflation weigh

By Ambar Warrick

Investing.com -- New Zealand’s economic growth missed expectations in the fourth quarter, data showed on Thursday, with gross domestic product instead shrinking amid pressure from a sharp rise in interest rates and high inflation.

GDP shrank 0.6% in the three months to December 31, from the prior quarter, more than expectations for a drop of 0.2%. On an annual basis, GDP rose 2.2%, ducking expectations for growth of 3.3%.

The reading comes amid a severe slowdown in the country’s top manufacturing and export industries, although strength in tourism helped lessen the blow of weakening business activity.

The reading also ramped up expectations that the Reserve Bank of New Zealand (RBNZ) will now taper its pace of interest rate hikes, given that it has limited economic headroom to keep raising rates.

But New Zealand consumer inflation remained pinned near 32-year highs, even as the RBNZ undertook an aggressive rate hike spree, raising its official cash rate by 450 basis points since mid-2021.

The central bank recently warned that inflation will likely come within its 2% target only by mid-2025, and that the economy is likely to contract by 1.1% in 2023, with a recession due to occur in the second quarter of the year.

RBNZ Governor Adrian Orr had also said that he was trying to engineer a small recession in order to combat inflation. But price pressures have so far remained sticky in the country, due to high import costs and strength in the employment market.

The New Zealand dollar fell as much as 1.2% after the GDP reading, but now appeared to have pared its losses and was trading sideways. Still, the currency was trading just above its weakest level since late-November.

The prospect of slowing economic growth and a lower terminal rate for the RBNZ has weighed heavily on the New Zealand dollar in recent sessions, while fears of rising U.S. interest rates also sapped sentiment towards the currency.