The country’s first economic report card for this year is out next week and chief economist Kerr says it looks like the Kiwi economy managed to dodge a (technical) recession over the summer period, but only by the narrowest of margins.

Economic activity contracted by 0.6% in the final quarter of 2022 and he expects that to be followed by a flat GDP print in the first quarter of this year.

Given the significant uncertainty over the quarter, with significant weather disruptions, Kerr says GDP could come in well above, or well below, Kiwibank’s 0.0% pick.

“What's important is the outlook. And the outlook is soft at best.”

Lift from post-cyclone clean up

The March quarter likely captured the lift in activity as the flooding and cyclone clean- up and rebuild got underway, he says.

Construction, for example, could have posted modest gains over the first quarter. According to Stats NZ, building activity picked up slightly over that time. Seasonally adjusted, the volume of activity rebounded 0.6% from Q4’s 1.6% decline.

The almost 4% jump in non-residential construction more than offset the 0.8% drop in residential building volume.

The drop in residential activity follows a drop in new house consents.

Compared to the December quarter, the number of new homes consented fell a seasonally adjusted 8.4%. Nonetheless, says Kerr, there is a 1.5% gain in construction activity over the March quarter.

“There may be more growth in the tank for construction activity. Activity had begun to slow with a housing market in retreat for the past year. But the rebuild has given the sector a second wind,” he says.

Slowing activity

The weak GDP may also be a function of slowing activity, as more timely economic indicators suggest.

Retail trade data show consumers spending more and getting less.

The cost-of-living crisis, the fall in property values, and the rise in interest rates are all weighing on household demand. And weak consumption points to weak production.

While the economy may have avoided a recession this time, the second half of 2023 is a different story,” Kerr says. 

“The RBNZ is actively working to slow domestic demand to rebalance the economy and return inflation to the 1-3% target,” Kerr says.

“While the RBNZ may have called time on rate hikes, the impact of previous increases is still working its way through the economy.

“There’s still a significant chunk of Kiwi mortgages enjoying the low rates of 2020/21. But when the time comes to refix, household discretionary incomes will inevitably be squeezed. The appetite to spend will wane, and in turn, economic activity will weaken,” he says.

Policy settings have been tightened, aggressively. And the global backdrop is weakening, especially as China’s post- Covid recovery is losing steam.

Against such a backdrop, Kerr says the bank’s base case still involves NZ slipping into a recession later this year – albeit a shallow, short-lived one.

“One upside risk to our forecast is the recent surge in net migration.

“Annually, net migration looks on track to hit 95,000-100,000 later this year. But we question how much it’ll add to the demand side of the equation,” says Kerr.

Australia experienced a similar surge in net migration when border restrictions were relaxed. Despite this, the Aussie economy growth was weaker than forecast over the first quarter, at just 0.2%.

“We could see the same play out here,” Kerr says.