RBNZ rate cuts signal recovery
New Zealand's economy contracted by 0.2% in the June 2024 quarter, a downturn that, while less severe than the anticipated -0.4%, still reflects ongoing economic struggles, according to Kiwibank.
Kiwibank chief economist Jarrod Kerr and senior economist Mary Jo Vergara (pictured above, left to right) noted that on a per capita basis, the picture was even grimmer, with GDP per capita down 0.5% for the quarter, marking the seventh consecutive contraction.
Dairy and durables deep in the doldrums
The latest data revealed significant weakness in the primary sector, with dairy exports falling and a broad underperformance across agriculture.
Spending across the economy remains soft, particularly on durable goods, which saw a steep 3.4% decline. The downturn in imports further highlighted the low domestic demand, as fewer goods were brought into the country.
Manufacturing provides a silver lining
Despite the overall downturn, some sectors showed resilience.
According to Stats NZ, seven out of 16 industries saw growth, with the most significant increase occurring in manufacturing, driven by gains in transport equipment, machinery, and equipment manufacturing – the largest rise in manufacturing activity since December 2021.
Household consumption also saw a modest lift of 0.4%, offering a glimmer of hope amid the broader economic challenges.
RBNZ cuts mark a turning point
The Kiwibank economists suggested the Reserve Bank’s (RBNZ) decision to cut the cash rate in August could signal a shift towards economic recovery. However, the ongoing recession is expected to push unemployment higher, with predictions that jobless rates will exceed 5% by the end of the year, up from the lows of 2021.
Recession’s toll on households and businesses
Consumer spending remains subdued, especially on big-ticket items, as households continue to tighten their belts in response to rising financial pressures.
Business investment showed some positive movement, with a 1.1% increase in the quarter, driven by gains in plant and machinery.
However, the overall economic environment remains challenging, with high construction costs and a weak housing market weighing on growth.
More rate cuts on the horizon
Market analysts are increasingly convinced that further rate cuts from RBNZ are imminent, with a 25 or even 50 basis point reduction expected in October.
The need to bring the cash rate below 4% is seen as critical to supporting a fragile economy that is not expected to stabilise until late 2025 or early 2026, the Kiwibank economists said.
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