New Zealand is back in recession: what does it mean for everyday investors?

Stats NZ released its latest gross domestic product (GDP) figures yesterday (click to read), showing that the economy contracted 0.1% in the fourth quarter of last year. This indicates that New Zealand slipped back into a technical recession at the end of last year. What does this mean for ordinary people? Should we be worried about the future direction of New Zealand's economy?

 

This recession largely reflects the Reserve Bank of New Zealand's efforts to control inflation through its market interventions. The Bank has been raising the official cash rate (OCR) to slow household and business spending, which is the main cause of the recession.

 

ANZ economists said yesterday that, although New Zealand entered a technical recession at the end of 2023, it is fundamentally different from the recessions seen during financial market and economic crises. This policy-driven slowdown is an inevitable consequence of excessive fiscal intervention and monetary stimulus following the COVID pandemic.

 

In other words, it is time to pay the ‘price’ for the macroeconomic stimulus introduced during the pandemic. If we do not pay that price, inflation will consume the entire economy.

 

 

 

This may be good news for New Zealand's future economic development。The Reserve Bank of New Zealand had forecast GDP growth of 0 in the fourth quarter of last year, so the actual result was slightly weaker than expected. Westpac senior economist Michael Gordon said the substantial 3.1% annual decline in GDP per capita highlighted the extent to which the economy had overheated.

 

Overall, yesterday's report suggests there is slightly less need to maintain tight monetary policy for an extended period. However, the Reserve Bank still has much to do before releasing its next Monetary Policy Statement in May this year. ASB economist Nathaniel Keall also said the result supported an earlier start to OCR cuts than the Bank's stated timing of mid-2025. ASB still expects the Bank is likely to cut the OCR in the second half of this year.

 

 

Net migration to New Zealand has surged over the past year or so. Although the country's population grew by a net 130,000 in the year to January, gross national product contracted. With more people but a smaller economy, ordinary people are feeling a sharper downturn than the headline figures suggest. On a per capita basis, GDP fell 0.7%.

 

Meanwhile, the latest market figures show that high interest rates have pushed the gap between property investors' gross rental yields and interest rates to its widest since 2008. Although average rental yields—the ratio of annual rental income to a property's purchase price—rose to 3.2% in February, their highest level since 2020, relatively low yields still mean many property investors must increase their rental income to cover mortgage repayments.

 

 

CoreLogic chief property economist Kelvin Davidson said that, despite the increase, yields remain low by historical standards. Compared with other investment returns, such as those on term deposits, rental property yields remain relatively low.

 

Davidson said plainly that, in the current market, rent falls far short of covering the losses caused by high mortgage interest rates, let alone other operating and maintenance costs. Property investors therefore need to supplement their cash flow from other income. Furthermore, restoring full interest deductibility will not solve this problem, because it is currently difficult for ordinary household investors to make the numbers stack up.

 

Auckland Property Investors Association head Sarina Gibbon said it was normal for new investors to need to top up mortgage payments for a period before their portfolios became cost-neutral and profitable over the long term. She reminded investors that rents are linked to tenants' incomes rather than landlords' costs. Achieving a cash surplus across a portfolio requires much more than adding up expenses and factoring in rent and profit. In fact, landlords who consider only mortgage repayment costs could breach their tenancy agreements by raising rents too much.

 

 

ANZ expects the pace of New Zealand's economic slowdown to stabilise around the middle of this year. The market may improve again when interest rates fall。Economists generally agree that interest rates have peaked. However, how quickly the Reserve Bank of New Zealand can lower the OCR depends largely on when inflation returns to its target range.

 

Notably, New Zealand's economic momentum has deteriorated markedly since mid-2022. This means economists and policymakers need to think seriously about how to improve productivity and lift the economy out of its current difficulties. Otherwise, we will all face a deeper recession.