Despite a report by Statistics New Zealand that the country’s GDP fell by 0.2% in the March quarter after previously rising by 3% in the December quarter, PM Jacinda Ardern remains optimistic that the situation will not worsen during the second quarter in a row, which would trigger a recession.
In an interview, the PM stated that the figures indicated a volatile environment and confirmed that exports were down a margin. The report highlighted that there was lower output from the agriculture, forestry, fishing, food, beverage and tobacco sectors.
Ardern noted that with the ongoing war in Ukraine and the rise in inflation, the situation remained tough but that most economists shared the view that a further drop in GDP was unlikely in the second quarter.
She added that there were contributing factors in the first quarter including the Omicron outbreak that necessitated new lockdowns both in NZ and in Shanghai, which affected the Chinese market. She further reiterated that there were reasons to have confidence in the economy, including low unemployment, low debt and border reopening.
Ardern said that inflation was likely to peak mid-year and then begin to drop off. By this time, she estimates that wage growth will have started to outperform the rising cost of living.
However, Bank of New Zealand Head of Research, Stephen Toplis, is not as optimistic, noting that though the June quarter figures are likely to improve, he expects the accumulation of pressures to result in a recession either in late 2022 or early 2023. Although the central bank has been increasing interest rates to tackle inflation, Toplis states that the impact will be slow coming and take a while to flow right through the economy.
He added that though he hoped the recession would be short-lived and shallow, the outcome was unpredictable as it also relied on the status of other global economies. He noted that many developed countries were also suffering from high inflation and rising interest rates. If the responses to this were the same, there was the risk that the situation could worsen for everyone. He highlighted how governments in Europe, Australia, the US and Canada were slowing down their economies, which was a problem for NZ as it relied on imports of their products.
Though he expects inflation to peak at about 7%, Toplis does not expect it to fall fast. He states the responsibility lies with the Reserve Bank in determining how much of an increment to interest rates will be needed to drive this fall.
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