New Zealand economy contracts as exports slump

© Reuters. A sailing boat can be seen in front of the central business district (CBD) of Wellington in New Zealand, July 2, 2017. Picture taken July 2, 2017. REUTERS/David Gray

By Lucy Craymer

WELLINGTON (Reuters) -New Zealand's economy unexpectedly contracted in the first quarter as a slump in exports swamped strong domestic spending, though analysts said it will dodge a recession as activity rebounds from coronavirus lockdowns.

Production-based output fell by 0.2% in the quarter, Statistics NZ said on Thursday, which was below economists' median expectations of a 0.6% rise and significantly fell short of the 3.0% rise in the December quarter. Annual gross domestic product rose 1.2%.

Statistics New Zealand said primary industries such as agriculture, forestry and fisheries drove the decrease, while goods-producing industries also experienced a slight decline.

Exports of goods and services fell 14.3% quarter-on-quarter, it said.

New Zealand's economy was hurt in the first quarter by the country's first significant nationwide outbreak of coronavirus infections as the Omicron variant spread and caused absenteeism across the country. Even so, the data did show that domestic demand remained strong.

"It's a mistake to obsess too much about quarter-to-quarter swings," said ASB Bank economists in a note.

They added, however, that growth is set to slow this year, with a plethora of mounting headwinds.

"Higher interest rates, ongoing cost pressures, slowing construction, softer agriculture production and more cautious households will remain big themes," ASB Bank said.

INFLATION IN FOCUS

The Reserve Bank of New Zealand (RBNZ) has already raised rates five times since October and has indicated it will double the cash rate over the next year to try and keep inflation under control.

It has said at this stage that restraining runaway inflation is worth taking the risk of tipping the economy into a recession. RBNZ had expected growth of 0.7% in the first quarter.

Michael Gordon, acting chief economist at Westpac New Zealand, said in a note that he doesn't think quarterly growth coming in lower than had been forecast will trouble the central bank.

"The RBNZ’s aim is to better align demand with the economy's potential in order to bring inflation pressures under control. A modest fall in activity would actually be helpful," he said.

However, the markets have now pared back their most aggressive rate hike calls, with two-year swaps down 23 basis points to 4.31%.