New Zealand recession catalyst for further easing by central bank

This week saw the New Zealand economy enter a recessionary phase in the business cycle with negative GDP for the June and September quarters. This was the steepest two-quarter downturn since 1991 and weaker than expected. The RBNZ (central bank) has recognised that there is a greater excess capacity (a bigger negative output gap), less pressure on inflation and will be even more confident that OCR (official cash rate) cuts will be required after February 2025. The move to a more neutral setting of the OCR around 3% likely by the middle of 2025. Nevertheless the fall in the NZ$ brings with it other issues like more expensive imports and not forgetting the global environment with a second Trump administration potentially enforcing protectionist measures on trade.

Business cycle and output gaps. Economies go through a regular pattern of ups and downs in the value of GDP. Within this you can identify the positive and negative output gaps. The business cycle is characterised by four main phases: 1 Peak: high levels of consumer spending, business confidence, profits and investment. Prices and costs also tend to rise faster. Unemployment tends to be low as growth in the economy creates new jobs – max positive output gap 2 Recession: falling levels of consumer spending and confidence mean lower profits for businesses – which start to cut back on investment.  Spare capacity increases + rising unemployment as businesses cut back and reduce stocks. 3 Trough: a prolonged period of declining GDP – very weak consumer spending and business investment; many business failures; rapidly rising unemployment; prices may start falling (deflation) – max negative output gap. 4 Expansion: things start to get better; consumers begin to increase spending; businesses feel a little more confident and start to invest again and build stocks; but it takes time for unemployment to stop growing.

Source: Wespac ECONOMIC BULLETIN – OCR change of call. 19/12/24

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