New Zealand economy to return to growth but will it end kiwi’s slide? – Preview
September 19, 2023 2:25 pm
New Zealand GDP expected to rise in Q2 after technical recession
But China woes and high interest rates to weigh on outlook still
Kiwi hoping for much needed lift when data is out Wednesday, 22:45 GMT
Return to growth after shallow recession
As the debate rages about whether major economies such as the United States and the Eurozone are headed for a recession, New Zealand’s comparatively smaller economy is about to emerge from one. New Zealand’s GDP contracted in the final three months of 2022 as well as in the first three months of 2023, meeting the technical definition of a recession.
But not only was the recession a very mild one, as year-on-year growth remained positive, it was also very brief as GDP is expected to have expanded in the second quarter. Economic growth is projected to have bounced back by 0.5% quarter-on-quarter, although the annual rate likely slowed to 1.2% from 2.2%.
RBNZ may be tempted to hike again
If the recovery is confirmed, it will come as both a blessing and a curse for the Reserve Bank of New Zealand, which deliberately put the brakes on the economy to increase slack. Yet, as of its latest policy meeting on August 16, it continued to fret about the “imbalance between demand and supply”, arguing that a “prolonged period of subdued spending growth is still required”.
A stronger-than-expected rebound in GDP could therefore heighten speculation about further tightening over the coming months. Investors see a slightly less than 50% probability of a 25-basis-point hike in the cash rate by April 2024. The cash rate currently stands at 5.50% – matching the Fed’s policy rate and one of the highest among the advanced economies.
The high borrowing costs have had a notable impact on dampening the housing market and consumer spending, as well as cooling down the hot labour market. The unemployment rate has edged up from a historical low of 3.2% at the beginning of 2022 to 3.6% in the second quarter of 2023.
China could become a tailwind again
But much of the economic weakness can also be attributed to the slowdown in China, which is New Zealand’s largest export destination. Local exporters have seen Chinese demand for agricultural products such as milk and meat plummet this year. However, the meltdown in China’s economy appears to be stabilizing and should demand begin to pick up soon, that would further boost the odds of additional rate hikes by the RBNZ.
Moreover, the property market also seems poised for a rebound despite sky-high mortgage rates amid an ongoing housing shortage, while the latest surge in oil prices could complicate matters too for policymakers. Inflation fell to 6.0% in Q2, but that’s still some distance from the 1-3% target band.
Has the kiwi bottomed out against the US Dollar?
With all that in mind, the RBNZ could adopt a somewhat more hawkish tightening bias when it meets in about two weeks’ time. Should the GDP numbers point to surprise resilience in the economy, the New Zealand dollar might find enough momentum to make a leap towards the 50-day moving average around $0.6040.
But in the event that the GDP data disappoints, the kiwi could resume its downtrend and head for the 78.6% Fibonacci retracement of the October 2022-February 2023 uptrend at $0.5730.
In the short term, however, the steadily improving economic picture in China has helped establish a floor under the latest slide at $0.5857 and the price action has been developing around the 61.8% Fibonacci.
New Zealand GDP expected to rise in Q2 after technical recession
But China woes and high interest rates to weigh on outlook still
Kiwi hoping for much needed lift when data is out Wednesday, 22:45 GMT
Return to growth after shallow recession
As the debate rages about whether major economies such as the United States and the Eurozone are headed for a recession, New Zealand’s comparatively smaller economy is about to emerge from one. New Zealand’s GDP contracted in the final three months of 2022 as well as in the first three months of 2023, meeting the technical definition of a recession.
But not only was the recession a very mild one, as year-on-year growth remained positive, it was also very brief as GDP is expected to have expanded in the second quarter. Economic growth is projected to have bounced back by 0.5% quarter-on-quarter, although the annual rate likely slowed to 1.2% from 2.2%.
RBNZ may be tempted to hike again
If the recovery is confirmed, it will come as both a blessing and a curse for the Reserve Bank of New Zealand, which deliberately put the brakes on the economy to increase slack. Yet, as of its latest policy meeting on August 16, it continued to fret about the “imbalance between demand and supply”, arguing that a “prolonged period of subdued spending growth is still required”.
A stronger-than-expected rebound in GDP could therefore heighten speculation about further tightening over the coming months. Investors see a slightly less than 50% probability of a 25-basis-point hike in the cash rate by April 2024. The cash rate currently stands at 5.50% – matching the Fed’s policy rate and one of the highest among the advanced economies.
The high borrowing costs have had a notable impact on dampening the housing market and consumer spending, as well as cooling down the hot labour market. The unemployment rate has edged up from a historical low of 3.2% at the beginning of 2022 to 3.6% in the second quarter of 2023.
China could become a tailwind again
But much of the economic weakness can also be attributed to the slowdown in China, which is New Zealand’s largest export destination. Local exporters have seen Chinese demand for agricultural products such as milk and meat plummet this year. However, the meltdown in China’s economy appears to be stabilizing and should demand begin to pick up soon, that would further boost the odds of additional rate hikes by the RBNZ.
Moreover, the property market also seems poised for a rebound despite sky-high mortgage rates amid an ongoing housing shortage, while the latest surge in oil prices could complicate matters too for policymakers. Inflation fell to 6.0% in Q2, but that’s still some distance from the 1-3% target band.
Has the kiwi bottomed out against the US Dollar?
With all that in mind, the RBNZ could adopt a somewhat more hawkish tightening bias when it meets in about two weeks’ time. Should the GDP numbers point to surprise resilience in the economy, the New Zealand dollar might find enough momentum to make a leap towards the 50-day moving average around $0.6040.
But in the event that the GDP data disappoints, the kiwi could resume its downtrend and head for the 78.6% Fibonacci retracement of the October 2022-February 2023 uptrend at $0.5730.
In the short term, however, the steadily improving economic picture in China has helped establish a floor under the latest slide at $0.5857 and the price action has been developing around the 61.8% Fibonacci.
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