New Zealand’s Economic Recession: As the world grapples with the economic aftermath of the pandemic, our neighbours across the Tasman Sea, New Zealand, have today (15th Jun 2023) slipped into a technical recession. This development, triggered by aggressive interest rate hikes by the Reserve Bank of New Zealand (RBNZ), has sent ripples of concern across the globe, including here in Australia. As Australians, it’s crucial to understand these economic shifts, as they could potentially foreshadow what lies ahead for our own economy.
New Zealand’s Economic Recession: A Closer Look
The term ‘recession’ is often met with apprehension, and for a good reason. It signifies a period of temporary economic decline, typically characterized by a fall in GDP in two successive quarters. In New Zealand’s case, the economy contracted by 0.1% in the first quarter of the year, following a 0.7% contraction in the previous quarter. This back-to-back contraction of the GDP has officially plunged the country into a technical recession.
The primary catalyst behind this economic downturn has been a series of aggressive interest rate hikes by the RBNZ. Since October 2021, the central bank has been steadily increasing the cost of borrowing, pushing interest rates to a 14-year high. This move was part of a broader global trend in the wake of the pandemic, with central banks worldwide raising borrowing costs to curb inflation. However, the speed and intensity of RBNZ’s actions have outpaced most, including the US Federal Reserve.
The Reserve Bank of New Zealand (RBNZ) and Its Decisions
The RBNZ’s aggressive monetary policy has been a double-edged sword. On the one hand, it was intended to keep inflation in check, a concern shared by many central banks worldwide as economies began to reopen post-Covid lockdowns. On the other hand, the rapid and significant increase in interest rates has had a substantial impact on New Zealand’s economy and its people.
New Zealanders, already grappling with rising prices, are now feeling the pinch of higher rates. The increased cost of borrowing has led to a jump in mortgage repayments and other loan costs. For instance, David Jordan, an Auckland-based web engineer, told the BBC that the interest rates are crippling. He also noted job losses in his industry as start-ups scramble to save money.
The situation in New Zealand serves as a stark reminder for Australians of the potential consequences of aggressive interest rate hikes. As the Australian economy continues to recover from the impacts of the pandemic, the Reserve Bank of Australia will need to navigate its monetary policy carefully to avoid a similar scenario.
Global Impact of Rising Borrowing Costs and Inflation
The economic downturn in New Zealand is not an isolated incident. It’s part of a larger global trend that has seen central banks around the world increase the cost of borrowing in an attempt to curb inflation. This inflationary pressure was triggered as economies began to reopen after the Covid lockdowns. The sudden surge in demand, coupled with supply chain disruptions, led to a sharp increase in the prices of goods and services.
Inflation was also driven higher by external factors such as the rising cost of commodities, notably fuel and food. The ongoing conflict in Ukraine has further exacerbated this situation, leading to a surge in energy prices worldwide. This global inflationary environment has put additional pressure on central banks, including the RBNZ, to act decisively to prevent their economies from overheating.
For Australians, the situation in New Zealand and the broader global economic landscape serve as a reminder of the delicate balancing act that the Reserve Bank of Australia (RBA) must perform. On the one hand, the RBA needs to ensure that the Australian economy continues to recover from the impacts of the pandemic. On the other hand, it must also keep an eye on inflation and be ready to take action if necessary. The experiences of New Zealand highlight the potential consequences if this balance is not maintained.
Other Factors in New Zealand’s Economic Recession
While the aggressive interest rate hikes by the RBNZ have played a significant role in New Zealand’s recession, they are not the only factor. The country’s economy has also been impacted by a series of unfortunate events, including natural disasters and industrial action.
In the first quarter of this year, New Zealand was hit by two cyclones, Hale and Gabrielle. These adverse weather events caused significant disruption to horticulture and transport support services, two key sectors of the country’s economy. They also disrupted education services, with teachers going on strike during this period.
These events highlight the vulnerability of economies to external shocks, whether they be natural disasters or other unforeseen events. For Australia, a country that is no stranger to extreme weather events and industrial action, the situation in New Zealand serves as a stark reminder of the need for resilience and adaptability in our economic planning.
What’s Next for the RBNZ and Potential Lessons for Australia
The contraction of New Zealand’s economy and the subsequent recession have led to speculation about the RBNZ’s next steps. The central bank had previously signaled that it had no further plans for hikes. However, the current economic situation may force it to reconsider its stance.
The experiences of New Zealand offer valuable lessons for Australia. As the RBA navigates its way through the post-pandemic economic recovery, it will need to carefully consider the impacts of its monetary policy decisions. The situation in New Zealand serves as a cautionary tale of what can happen when interest rate hikes are too aggressive.
The RBA will need to strike a balance between supporting economic recovery and keeping inflation in check. It will also need to be prepared to respond to external shocks, whether they be natural disasters, global economic events, or other unforeseen circumstances.
Conclusion: What Australians Can Learn from New Zealand’s Situation
As we observe the economic situation unfolding in New Zealand, it’s crucial to extract key lessons and insights that can inform our approach here in Australia. The aggressive interest rate hikes by the RBNZ, while intended to curb inflation, have contributed to pushing the country into a technical recession. This outcome underscores the delicate balance that must be struck when implementing monetary policy measures.
For Australians, the situation in New Zealand serves as a stark reminder of the potential impacts of rapid and significant changes in interest rates. As the Australian economy continues to recover from the impacts of the pandemic, the Reserve Bank of Australia (RBA) will need to navigate its monetary policy carefully. The experiences of New Zealand highlight the potential consequences if this balance is not maintained.
Moreover, the external shocks experienced by New Zealand, such as the cyclones and teachers’ strikes, underscore the importance of resilience and adaptability in economic planning. Australia, a country that is no stranger to extreme weather events and industrial action, can take note of how these events can exacerbate economic challenges.
Looking ahead, as the RBA charts its course, it will need to carefully consider the lessons from New Zealand. Striking the right balance between supporting economic recovery and keeping inflation in check will be crucial. At the same time, building resilience to external shocks and maintaining adaptability in the face of unforeseen events will be key to ensuring the ongoing health and stability of the Australian economy.
In conclusion, while the recession in New Zealand is concerning, it also provides valuable lessons for other countries, including Australia. By observing and learning from these events, we can aim to navigate our own economic challenges more effectively and work towards a stable and prosperous future.
A finance geek with over 20 years of experience, Joseph Bancroft, known as Joe, is the Chief Editor at Money News Biz. He's an acclaimed author, blogger, speaker, and mentor, with a knack for forecasting economic trends and identifying investment opportunities. Joe blends professional acumen with a quirky charm, making him a respected and engaging figure in the finance industry.