RBNZ May Well Have Overplayed its Hand
PUBLISHED
2023-03-16
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Has New Zealand become the first major economy where economic growth has been battered into contraction by a central bank’s overaggressive tactics in the battle against persistently high inflation?
The Reserve Bank of NZ first lifted rates in October 2021 with an increase of 0.25% which pushed the official Cash Rate (OCR) to 0.50%. Since then, rates have risen more 10 times, including one monster of 0.75% last November – at a time when it now turns out growth was contracting.
That raises the question of just how in touch with the real economy was the RBNZ late last year when it decided in the huge rise?
Since August 2022, the RBNZ has boosted rates by 1.75% in three separate increases - which now look to have been redundant - and if the NZ recession turns out to have been deep and long, the trio will be seen as overkill by a central bank that got it wrong.
Statistics NZ surprised on Thursday that the country’s economy had gone backwards in the three months to December with a contraction of 0.6% and that the previously strong 2% growth in the third quarter, had been cut to 1.7% (which is still solid).
That saw annual growth for 2022 slow to just 2.2% from the very strong 6.4% in the year to September.
In contrast, the Australian economy grew a sluggish 0.5% in the final quarter for growth through 2022 of 2.7%.
And while our labour market is also strong (as we saw yesterday with the jobless rate back at 3.5% from 3.7% in January), the surprise contraction in the NZ economy will remind the Reserve Bank of Australia that there are limits to being too aggressive, even if our cash rate is 3.6%, well below NZ’s 4.75%.
The GDP data was also a blow to the credibility of the Reserve Bank of NZ’s forecasting ability - the country’s economy contracted 0.6% in the final three months of 2022 instead of growing 0.7% as the central bank had forecast late in its monetary policy statement issued less than a month ago in February.
Despite the RBNZ’s optimism in its February forecast, markets had been expecting a small rise or contraction in 4th quarter GDP for New Zealand, but no one predicted the shock contraction of 0.6% nor the downward revision of the 3rd quarter growth in what was a big miss for everyone.
Statistics NZ shock announcement on Thursday of the 4th quarter contraction also revised 3rd quarter growth to 1.7% instead of 2%. Both seem to be a warning the economy is sliding into recession.
But if the current March quarter sees a contraction, then the NZ economy will be in a recession thanks to the shock contraction over the final months of last year.
And that will mean the RBNZ will have gotten its recession - with inflation still high at 7.2% (for 2022) and will have to think again before raising rates - its next meeting is on April 5, just before Easter.
The fall in GDP in the three months to the end of December was larger than any of the serious forecasting groups had predicted.
Prior to the Thursday announcement, ASB (owned by the Commonwealth Bank of Australia) had been forecasting GDP would contract 0.5%, with the other four major banks predicting drops of either 0.2% or 0.3% after some late downward revisions.
If Statistics NZ confirms on June 15 that GDP also fell in the March quarter, the country is in an unusual type of recession – one that is characterised by a still very strong labour market and historically low level of unemployment.
The culprits for the December quarter slide were a substantial drop in manufacturing and goods exports and continuing high imports.
Statistics NZ said nine of the 16 sectors of the economy it tracked experienced declining activity during the December quarter, with manufacturing – the hardest hit – shrinking 1.9%.
“A fall in transport equipment, machinery and equipment manufacturing corresponded to lower investment in plant, machinery and equipment while reduced output in food, beverage and tobacco manufacturing was reflected in a drop in dairy and meat exports,” national accounts manager Ruvani Ratnayake said.
Activity in the accommodation, retail and transport sectors also fell. That’s despite reports of a pickup in tourism.
Unlike resource rich Australia and our continuing trade and current account surpluses, NZ’s external position is weak with a record current account deficit in 2022.
The annual current account deficit was $NZ33.8 billion (8.9% of GDP) in the December 2022 year. This was $NZ12.7 billion larger than in the December, 2021 year or 6% of GDP.
Statistics NZ said, "This is the largest annual current account deficit to GDP ratio since the series began in March 1988. The largest prior to the COVID pandemic was 7.8 percent of GDP in December 2008, during the global financial crisis.”
The widening in the annual current account deficit was mainly due to a $NZ10.0 billion widening of goods and services deficit and $NZ2.7 billion widening of the income deficit.
For the year ended 1 December 2022, exports of goods and services rose a solid 16.8% or $NZ13.1 billion to $NZ90.7 billion.
"Dairy and meat products contributed to the increase in goods exports, while the increase in services exports was driven by travel services – the spending of overseas visitors in New Zealand,” Statistics NZ said.
But the cost of imports of goods and services surged nearly 16% in the same period or $NZ23.0 billion to $112.2 billion.
"The increase in goods imports was driven by machinery, petrol, and motor vehicles. The increase in services imports was driven by transportation services, business services, and travel services,” Statistics NZ explained.
“Since New Zealand’s borders opened more New Zealanders have been travelling overseas. The spending on both air transport and travel contributed to the rise in services imports for the year to December 2022,” institutional sectors senior manager Paul Pascoe said.
Judging by Thursday’s data, the NZ economy isn’t in good shape.