14 Dec 2023

Double-dip recession likely - Kiwibank economist

From Checkpoint, 5:07 pm on 14 December 2023

The Reserve Bank (RBNZ) got what it wanted and should back down on its threat of future interest rate hikes, a high-profile economist says.

The economy shrank in the third quarter as households spent less, exports fell, and manufacturing activity decreased, new figures showed on Thursday.

"Not only did we get a contraction on the quarter, the statisticians revised down all the previous quarters over the last year or so," Kiwibank chief economist Jarrod Kerr told Checkpoint

"So our economy is actually, you know, 2 percent smaller than we thought it was. What that means is that the government's tax take is going to be less - the economy is simply smaller, less GST, less corporate tax."

Stats NZ data showed seasonally adjusted gross domestic product (GDP) fell 0.3 percent in the third quarter, the opposite of the RBNZ's forecast growth of 0.3 percent. 

"We are in recession - we recorded one last summer and we're going to record one this summer," Kerr said. "So the rapid rise in interest rates, the RBNZ has hiked aggressively with a heavy hand, has had an impact and households are hurting and, and so are small-to-medium businesses."

The official cash rate has risen from 0.25 percent two years ago to 5.5 percent. RBNZ head Adrian Orr admitted its goal was to engineer a recession to bring inflation back down to its 1-3 percent target range. 

In November the RBNZ said inflation was dropping, but not as quickly as it would like - so further hikes could be on the cards.

"This is exactly what they've been trying to engineer - they told us, you know, late last year that they wanted to engineer a recession. They needed to do so in order to get inflation pressure back down. So from their point of view, it's kind of 'job done'.

Kiwibank chief executive Jarrod Kerr

Jarrod Kerr. Photo: Supplied / Gino Demeer

"What we're saying is that, you know, the job is done - stop telling us that you're going to keep hiking rates because it's not needed… The next discussion should be rate cuts, not hikes." 

The fall in GDP comes despite a huge influx of migrants. 

"We've got a contraction of 0.3 percent despite the fact that we've imported 130,000 net migrants over the last year.

"So when you look at things on a per capita basis, per head, they were down 0.9 percent on the quarter and we're down 3 percent over the year.

"So, you know, the RBNZ rate hikes are having a big impact on households and we've seen consumption coming off even though there's a lot more people in the economy."

The consequences posed a problem for the new government, Kerr said.

"We're basically waiting for the Treasury's numbers next week to get a good handle. But it's going to be weaker than they thought, and it's going to be weaker than what was in the Budget earlier this year.

"That's the main point - less revenue. That means it's going to be tougher on the other side, on the spending side.

"Potentially, you know - they're going to have to work through what they can cut and what they, what they are gonna stick to with their, with their promises.

"It's going to be a very tough job. These numbers don't help."

The government has scrapped numerous initiatives put in motion by its predecessor to help pay for its promised tax cuts and reinstatement of deductibility for landlords.

Kerr said there was some light at the end of the tunnel.

"Look, I think there are some bright spots. I mean, the housing market seems to be recovering quite nicely. We'll see house price gains next year. That'll be good for a lot of Kiwis. 

"Tourism is picking up. We're hearing anecdotes of Chinese tourism slowly picking up, which is key. They've been a missing ingredient. So hopefully we get a bumper summer, you know, particularly in tourist numbers and student numbers and you we'll be on a better footing, I think later next year."