Economists say economy already shrinking but OCR still likely to rise


The economy is expected to have shrunk at the end of last year, much sooner than Reserve Bank (RBNZ) has forecast.

Gross domestic product (GDP), the broad measure of the economy's value, is forecast to have contracted between 0.2 and 0.5 percent for the three months ended December. The RBNZ has forecast a rise of 0.7 percent for the quarter.

Manufacturing, construction, retail sales and business activity have all been slowing.

ANZ senior economist Miles Workman said there might be an element of payback for the surprising supersized 2 percent rise in the previous quarter, and the big question was whether the normal summer pattern of holiday spending, tourism, and housing rebound would occur.

"With international visitor arrivals coming in around 32 percent below their pre-pandemic [levels]... and the housing market still in retreat, it simply wouldn't pass the sniff test."

He said the data had been shaken up by the pandemic and all its disruptions, and that would likely cause "statistical noise".

Economists were reluctant to suggest one quarter of negative growth was the start of the much-predicted recession - two consecutive quarters of negative growth - which the RBNZ has said is probably needed to cool the economy and tame inflation.

"Whether this is a sign that recession has come upon us earlier than expected is unclear," Westpac acting chief economist Michael Gordon said.

"Notwithstanding the current volatility in the GDP numbers, we still think that the scene is set for the economy to head into recession later this year."

Gordon said a slowing in the economy should have some influence on how far the RBNZ decided to raise interest rates.

"If the one big piece of data comes in below their forecast by quite a substantial amount, then I think it would lead them towards a smaller move."

Gordon is now forecasting a 25 basis point rise to 5 percent in the Official Cash Rate (OCR), and financial market pricing indicates possibly one more rise after that.

Last month the RBNZ raised the OCR by 560 basis points to 4.75 percent in February and has been indicating a peak at 5.5 percent towards the end of the year.

ANZ's Workman said inflation at 7.2 percent remained too high and too stubborn for the RBNZ to halt rate rises for the sake of one quarter of soft growth.