SYDNEY — New Zealand’s economy fell into a recession in the first three months of this year as soaring interest rates and the effects of a cyclone that devastated the North Island forced activity to contract for a second successive quarter.
The agriculture-rich economy contracted 0.1% during the first quarter and grew 2.2% in annual terms, Stats NZ said Thursday. The weak results follow a 0.7% contraction in the fourth quarter of last year.
The slowdown in the economy has seen the Reserve Bank of New Zealand signal recently it could be done tightening the policy screws. The official cash rate now stands at 5.50%, its highest level in more than 14 years.
Still, the central bank has also warned that inflation is likely to remain high for some time, ruling out near-term interest-rate cuts.
Cyclone Gabrielle, which brought widespread flooding and killed 11 people in February, reduced spending and home-building activity in the quarter. But the recovery operation is expected to support growth in the second quarter.
Still, the economy should remain sluggish for some time, said Jarrod Kerr, chief economist at KiwiBank.
“The outlook remains awkward, to put it politely. We expect further contractions in economic activity over 2023, and possibly into 2024,” Kerr said.
“We may see the unemployment rate rising to 5-5.5% in 2024. But as the labor market loosens, the inflationary impulse will soften,” he said.
The recent government budget included 1.1 billion New Zealand dollars ($ 687 million) to fund the recovery from the cyclone. The total cost of the disaster is estimated to be as high as NZ$ 14.5 billion.
Migration into New Zealand is recovering at speed, with tourism, a major contributor to the economy, rebounding from the disruption posed by the Covid-19 pandemic.
The areas of weakness in the economy in the first quarter included services, transport, manufacturing and education, the statistician said.