By Wayne Cole

SYDNEY (Reuters)

New Zealand’s economy sank into recession in the third quarter, with activity declining more sharply than expected. The previous quarter’s output was also revised down, reinforcing the need for aggressive rate cuts.

The unexpected news caused the local dollar to fall to a two-year low of $0.5614, a decline of 2.2% following a hawkish U.S. Federal Reserve easing. Market expectations rose for the Reserve Bank of New Zealand (RBNZ) to further cut rates after already reducing them by 125 basis points to 4.25%. Swaps indicated a 70% chance of a 50-basis-point cut in February, with rates potentially dropping to 3.0% by the end of 2025.

Thursday’s data revealed a 1.0% decrease in gross domestic product (GDP) for the September quarter, far surpassing the forecasted 0.2% contraction. The June quarter was revised to show a 1.1% decline, marking two consecutive quarters of decline, a technical recession. This is the largest decline since the deep downturn of 1991, barring the pandemic.

“It was dramatically worse than anyone had expected,” said Abhijit Surya, an economist at Capital Economics. He suggested that given the economic state, the next RBNZ cut could be larger, potentially 75 basis points, lowering rates eventually to 2.25%.

The results starkly contrasted the RBNZ’s forecast of a 0.2% drop and came just days after New Zealand’s Treasury predicted only a 0.1% decline. The government has since abandoned expectations of returning to budget surpluses, forecasting deficits for the next five years.

Finance Minister Nicola Willis criticized the central bank’s role in the economic downturn, stating, “The decline reflects the impact of high inflation on the economy, leading the Reserve Bank to engineer a recession which has stifled growth.”

TURNING THE CORNER?

The economic weakness affected multiple sectors, notably manufacturing, utilities, and construction. There was a decrease in household and government spending, alongside challenges in investment and exports.

For the year ending in September, output fell by 1.5%, the steepest decline since the pandemic and significantly diverging from the expected 0.4% dip. Despite the country’s population growth of 1.2% to 5.35 million, GDP per capita dropped 2.1% for the year.

Substantial revisions by the statistics bureau adjusted GDP growth upward by nearly 2 percentage points over the two fiscal years leading to March 2024. This revision changed the economic starting point, eliminating the classification of a recession and previous stagnant growth contributing to the former Labour government’s fall.

Analysts still held some optimism for economic recovery, as the RBNZ had lowered borrowing costs by one percentage point this quarter. An ANZ survey released on Thursday indicated potential recovery signs in December, with confidence nearing historic highs.

“The survey showed more signs of demand recovering, with the first solid increase in past activity, the best GDP indicator in the survey,” remarked Sharon Zollner, head of New Zealand economics at ANZ. “The bar for improvements going forward is clearly pretty low.”