What’s in store for New Zealand’s economy in 2022 and beyond?

Summary

  • New Zealand’s economy contracted by 0.2% in the March quarter of 2022.
  • Global macro factors have clouded New Zealand’s growth outlook, with inflation and interest rate hikes making the situation more challenging.
  • Experts believe that strong exports could give a boost to the country’s economic growth.

While the New Zealand (NZ) economy has recovered quickly from pandemic-related disruptions, global macroeconomic factors are now shaping a slower growth outlook for the country. Meanwhile, rising interest rates are weighing on households nationwide. Economists are now worried about a possible drop in consumer demand, which could threaten the country’s economic recovery.

In a recent report, the New Zealand Institute of Economic Research (NZIER) announced a downward revision to New Zealand’s growth outlook for the coming years. The report says heightened pessimism among households and businesses could translate into reduced spending and business investment. Meanwhile, the report highlighted growing headwinds for the economy, including global supply chain disruptions, war in Ukraine and rising interest rates.

Against these headwinds, New Zealand exports are expected to keep the economy afloat. NZIER expects solid export growth amid continued international demand for New Zealand exports. Overall, conditions are expected to remain challenging for the country as inflation could rise further in the coming months. In response to inflation, the Reserve Bank of New Zealand (RBNZ) could continue its series of policy tightenings. Thus, future policy measures should be geared towards boosting domestic demand.

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Unoptimistic data on New Zealand’s GDP

Gross domestic product (GDP) figures recently released by Stats NZ reveal that New Zealand’s economy contracted by 0.2% in the March quarter of 2022 compared to the December quarter of 2021. The drop in GDP came after a 3% expansion in the previous quarter. The economic downturn has come as a major shock to government officials and the public.

The Reserve Bank had widely expected GDP to grow by 0.7% in the first three months of 2022. Meanwhile, GDP forecasts from ANZ, BNZ and Westpac were for zero percent growth for the quarter. Some experts believe the latest GDP result has boosted the possibility of a recession in the coming months.

However, it is important to note that the Omicron epidemic influenced the data for the March quarter of 2022. There was a slight decline in economic activity during the period due to the shortage of personnel and the increase in Omicron cases in the country. But the challenges developed over the following months seem more concerning because they could take even longer to solve.

Global factors weighing on the economy

The March quarter was marked by fears surrounding rising interest rates and the start of the Russian-Ukrainian war. As New Zealand’s economy emerged from the pandemic, reports of the Russian-Ukrainian war again created uncertainty.

At the same time, interest rate hikes have become the focal point of the economy, leading to lower consumer confidence. Central banks around the world have adopted high interest rates to combat inflationary pressures.

GDP data for the March 2022 quarter further revealed a decline in production in the food, beverage and tobacco manufacturing subsector. Additionally, industries such as agriculture, forestry and fishing have seen a decline in production. Many experts believe that the losses of the previous quarters could be offset by significant increases in the months to come.

Reopening borders to the rescue

Speculation is rife that the months following the June quarter could see an upturn in economic activity. The reopening of international borders should be an essential source of strength in these current times of distress.

In particular, international tourism plays an important role in New Zealand’s economic growth. During the pandemic, the absence of foreign tourists has taken a deep toll on the economy despite many other headwinds. The tourism, hospitality and entertainment sectors have suffered a disproportionate impact from the pandemic. With the reopening of borders, New Zealand could see a rebound in these sectors. However, the latest GDP data has clouded the economic outlook, prompting experts to revise their expectations for the coming years.

All in all, the next few months promise to be full of uncertainties. Supply chain disruptions and global inflationary pressures have made post-pandemic recovery even more challenging. However, the New Zealand labor market remains tight, with strong exports expected to keep the economy afloat. However, the actual circumstances should become clearer over time.

GOOD READ: Will the fall in GDP have an impact on the monetary position of the RBNZ in the next MPC?

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