New Zealand’s economy unexpectedly contracted in the first quarter as COVID-19 ran rampant through the population for the first time and interest rates rose in response to soaring inflation.
GDP fell 0.2 percent from the fourth quarter, compared with a forecast 0.6 percent gain, Statistics New Zealand data showed yesterday. From a year earlier, the economy expanded 1.2 percent, just half the 2.4 percent predicted.
The slowdown is unlikely to deter the Reserve Bank of New Zealand (RBNZ) from further increasing borrowing costs to tackle inflation, which might exceed 7 percent this quarter.
Photo: Reuters
Most economists predict growth to rebound, although with house prices falling and global uncertainty elevated, some say the risk of a recession next year is rising.
“We don’t think that this will trouble the central bank,” said Michael Gordon, acting New Zealand chief economist at Westpac Banking Corp in Auckland. “The RBNZ’s aim is to better align demand with the economy’s potential in order to bring inflation pressures under control. A modest fall in activity would actually be helpful in that regard.”
The economy was disrupted in the first three months of the year, when COVID-19 swept the country for the first time. That left many industries short of staff and customers as people isolated or worked from home.
At the same time, the tourism industry was struggling behind a closed border, while soaring fuel and food costs began to damp discretionary spending. The government cut fuel taxes in mid-March to provide relief for consumers and began progressively opening the border to foreign visitors from April.
The RBNZ, which started raising rates in October last year, last month announced a second successive half-percentage-point hike. It increased the official cash rate to 2 percent and signaled it wanted to raise the benchmark “at pace” toward 4 percent.
Most economists see another half-point increase next month, but many tip quarter-point adjustments thereafter as higher borrowing costs start to squeeze households.
House prices dropped 5.6 percent in the three months through last month, as higher mortgage rates started to bite, the Real Estate Institute said on Wednesday.
The first-quarter GDP contraction was led by primary industries and manufacturing, while services were flat, the statistics agency said.
Exports fell 14 percent led by tourism and international education as the border remained closed, while imports fell 2.8 percent, it said.
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