New Zealand’s economy shrank by 0.6 percent in the fourth quarter of 2022, missing forecasts for growth and increasing the likelihood of a recession. This news makes further interest rate hikes less likely. According to official data from Statistics New Zealand, the GDP failed to meet analysts’ expectations of a 0.2 percent contraction and was well below the Reserve Bank of New Zealand’s forecast of 0.7 percent growth. The weakness in the economy is broad-based, and conditions are already recessionary for manufacturing, retail, trade, and accommodation.

Possible Causes of Recession

Economists suggest that the weak data means the country may already be in a recession, particularly given the impact of severe weather in January and February on the economy. Capital Economics notes that the outlook for the first quarter remains gloomy.

Less Overheated Economy

Regardless of whether the country is entering a recession, the economy is much less overheated than the Reserve Bank of New Zealand had expected. The central bank has undertaken its most aggressive policy tightening since 1999, lifting the official cash rate by 450 basis points since October 2021 to 4.75 percent. However, the market is betting that the bank’s plan to hike the official cash rate by a further 75 basis points this year to 5.5 percent by the third quarter will be pared back. Citi analysts predict GDP contractions in the first and second quarters and see no need for the Reserve Bank of New Zealand to increase the rate to 5.50 percent.

Market Reaction

The New Zealand dollar was down before the data, but it extended the fall to be off 0.6 percent at $0.6145 after the data release. Additionally, the market is now 50-50 on whether the Reserve Bank of New Zealand hikes 25 basis points in April, while the terminal rate is seen at 5.11 percent rather than the bank’s projection of 5.5 percent. NZ bank bill futures have surged as the market priced in a lower peak for Reserve Bank of New Zealand rates. Two-year swaps are also near a two-month low of 4.925 percent, having fallen sharply overnight as bank sector concerns drove down bond yields globally.

New Zealand spent two quarters in recession in 2020 because of tight restrictions when the COVID-19 pandemic hit, but prior to that, the economy had not contracted since late 2010. The current weak data may indicate that the country is once again entering a recession, but regardless, the economy is much less overheated than the Reserve Bank of New Zealand had anticipated, and the market is betting that further interest rate hikes will be pared back.