What’s In Store For New Zealand Economy In 2022 And Beyond?

Friday, 17 June 2022, 5:47 pm
Opinion: Kalkine

Summary

• The New Zealand economy contracted by 0.2% in the March 2022 quarter.
• Global macroeconomic factors have clouded the growth outlook for NZ, with inflation and interest rate hikes making the situation more challenging.
• Experts believe that strong exports could give a leg up to the country’s economic growth.

While the New Zealand (NZ) economy quickly recovered from pandemic-related disruptions, the global macroeconomic factors are now shaping a slower growth outlook for the country. Meanwhile, rising interest rates are weighing down on households at the domestic level. Economists are now worried about a potential decline in consumer demand, which could threaten the country’s economic recovery.

In a recent report, the New Zealand Institute of Economic Research (NZIER) announced a downward revision to NZ’s growth outlook for the coming years. The report stated that increased pessimism among households and businesses could translate into reduced spending and business investment. Meanwhile, the report highlighted increasing headwinds for the economy, including global supply chain disruptions, the war in Ukraine and rising interest rates.

Against these headwinds, New Zealand exports are expected to keep the economy afloat. NZIER anticipates a solid export growth amidst continued international demand for New Zealand exports. Overall, the conditions are expected to remain tough for the country as inflation could rise further in the coming months. In response to inflation, the Reserve Bank of New Zealand (RBNZ) could continue its policy tightening streak. Thus, upcoming policy measures need to be oriented towards reviving domestic demand.

ALSO READ: Inflation worries: OECD asks NZ government to take targeted action

Downbeat NZ GDP data

The recently released Gross Domestic Product (GDP) numbers by Stats NZ reveal that the New Zealand economy contracted by 0.2% in the March 2022 quarter compared to the December 2021 quarter. The decline in GDP came after an expansion of 3% in the previous quarter. The economic slowdown emerged as a major shocker for the government authorities and the public.

The Reserve Bank had largely expected the GDP to rise by 0.7% in the first three months of 2022. Meanwhile, the GDP forecast by ANZ, BNZ and Westpac was zero per cent growth for the quarter. Some experts believe that the latest GDP result has strengthened the possibility of a recession in the coming months.

However, it is important to note that the Omicron outbreak influenced the March 2022 quarter data. There was a minor dip in economic activity during the period due to staff shortages and rising Omicron cases in the country. But challenges developed over the following months seem more concerning as they might take even longer to resolve.

Global factors weighing on the economy

The March quarter was marked with fears surrounding interest rate hikes and the beginning of the Russia-Ukraine war. Just as the New Zealand economy was coming out of the pandemic, reports of the Russia-Ukraine war created uncertainty again.

At the same time, interest rate hikes became the focal point in the economy, leading to a drop in consumer sentiment. Central banks across the globe embraced high-interest rates to combat inflationary pressures.

The March 2022 quarter GDP data further revealed lower output in the food, beverage, and tobacco manufacturing sub-industry. Additionally, industries like agriculture, forestry and fishing observed a decline in output. Many experts believe that the losses in the previous quarters might be compensated for by significant rises in the coming months.

Border reopening to the rescue

Speculations are rife that the months following the June quarter could see a revival in economic activity. The reopening of international borders is expected to be a key source of strength in the current times of distress.

Notably, international tourism plays an important role in New Zealand’s economic growth. During the pandemic, the absence of foreign tourists was felt deeply in the economy despite many other headwinds. The tourism, hospitality, and entertainment sectors saw a disproportionately high impact of the pandemic. As borders reopen, NZ could witness a rebound in these sectors. However, the latest GDP data has clouded the economic outlook, prompting experts to revise their expectations for the coming years.

All in all, the next few months are expected to be full of uncertainty. The supply-chain disruptions and global inflation pressures have made the post-pandemic recovery even more challenging. However, New Zealand’s labour market remains tight, with strong exports expected to keep the economy afloat. However, the real circumstances are anticipated to become clearer with time.

GOOD READ: GDP fall to impact RBNZ’s monetary stance in next MPC?

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