Recession hits New Zealand: Decoding New Zealand’s Falling Economy
New Zealand had fallen into a “technical recession” on 15th June after negative GDP growth in the first quarter of FY 24 and the last quarter of FY 23
New Zealand’s agriculture-driven economy has fallen into recession, according to official data released on 15th June, with a damaging cyclone fuelling a widespread downturn just months before national elections. Its gross domestic product (GDP) fell by 0.1% in the first three months of the year, official figures show. That followed a 0.7% contraction in the previous quarter (October-December), which means the economy is in a “technical recession”.
A technical recession is defined as two consecutive quarters of negative economic growth measured by a country’s gross domestic product (GDP).
Factors responsible for New Zealand’s falling economy
Central Bank’s aggressively raised interest rates:
The Reserve Bank of New Zealand (RBNZ) has increased the cost of borrowing sharply since October 2021. New Zealand was one of the first countries to start raising rates in the wake of the pandemic and has outpaced the US Federal Reserve. Last month, the RBNZ increased its main interest rate to 5.5%. People in New Zealand, who were already facing rising prices, are now feeling the impact of higher rates as mortgage repayments and the cost of other loans jump. The New Zealand dollar slipped 0.2% to $0.6197 after the data as it was in line with market expectations and gave traction to the central bank’s position that no further interest rate hikes would be needed.
Climate creating a challenge:
January flooding in Auckland and destruction caused by Cyclone Gabrielle in February both weighed on the economy. The government estimates it will cost up to NZ$15 million (US$9 million) to mop up the damage caused by the extreme weather. This is New Zealand’s first recession since 2020 when the pandemic shuttered borders and choked exports.
Rise in food prices:
Households spent less on goods, particularly food, even as the costs of those foods rose further. According to price index data released on Wednesday, grocery food prices were up by 12.7% compared with the same period the year before, with fruit and vegetable prices increasing by 18.4%
Increase in Inflation:
Inflation in New Zealand is tracking at 6.7%, well above the central bank’s target band of 1% to 3%. Economists say indications that momentum is slowing will be welcomed by the central bank, which has said it was trying to engineer a recession to rein in inflation in its most aggressive policy tightening since 1999 when the cash rate was introduced. The cash rate, now at its highest level in 14 years at 5.5%, has risen 525 basis points since October 2021, and the central bank at its last meeting in May said the cash rate had now peaked.
🔵 Reasons for Yes
- International trade agreements such as the discussion around free trade with India are measures that can help improve the economy of the country
- Improved weather conditions such as the subsiding of Cyclone Gabrielle can help in boosting the economy as it was a major factor behind New Zealand entering a recession.
🔴 Reasons for No
- Inflation is on the rise at 6.7% which is above the central bank’s target band of 1% and 3%
- Business services in the country are down 3.5%, and transport, postal and warehousing, are down 2.2%.
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