New Zealand Dollar: Double-dip Recession Forecast at Kiwi Bank

• GBPNZD could hit 2.10
• As NZ economy endures double-dip recession
• Surging immigration to soften the hit says Kiwibank
• RBNZ to begin cutting rates as early as 2023 says Capital Economics

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Analysis from Capital Economics shows the New Zealand Dollar is likely to struggle as the Reserve Bank of New Zealand will likely lead the next interest rate-cutting cycle, a development that is potentially not too far given fresh warnings from a domestic bank that the economy faces a double-dip recession.

Kiwibank has updated its economic forecasts and says the recession of the two quarters that straddled the start of 2023 will now be followed by another recession in the second half of the year.

"We are still expecting a continued slowing in activity. And this time, it won’t be down to bad weather or teachers on strike. The RBNZ’s sheer determination to constrain demand cannot be discounted," says Jarrod Kerr, Chief Economist at Kiwibank.

The New Zealand Dollar is one of the laggards of global foreign exchange as investors anticipate an end to the RBNZ's rate-hiking cycle in the face of a slowing economy that culminated in a technical recession in Q4 2022 and Q1 2023.

Another three consecutive quarterly declines are anticipated from here. To be sure, Kiwibank slightly raises its forecasts on surging net migration levels (+72K) which should both boost demand and domestic output. It also anticipates the second quarter of 2023 to see growth amidst a combination of cyclone rebuild and payback for the 0.8% contraction recorded in the previous six months.

But this uplift won't be enough to counter the 525bps of rate hikes delivered by the RBNZ. "While the RBNZ may have called time on rate hikes, previous rate increases are still working through the economy. When the time comes to re-fix, discretionary incomes will be squeezed further. And the appetite to spend will wane," says Kerr.

Kiwibank forecasts a three-quarter, cumulative 0.4% contraction in economic activity beginning from the second half of the year.

A potential upside risk to the forecasts lies with any bigger-than-expected boost to tourism, which has thus far undershot expectations for a firmer rebound.

New Zealand Dollar Outlook: More Weakness as RBNZ Cuts

Regarding the RBNZ, Kiwibank says the time for interest rate cuts "will come, sooner rather than later... if the economy develops in a way we expect, then the RBNZ will start easing early next year."

But analysts at Capital Economics - the independent economics research company - say the cuts will come sooner and the RBNZ will lead the interest rate-cutting cycle as "the worst looks set come" for the economy.

Capital Economics anticipates a slowing global economy and a falling housing market to prompt the RBNZ into easing policy: "In contrast to the market, we expect the RBNZ to begin cutting interest rates before the end of the year."

Foreign exchange markets are highly reactive to interest rate differentials at the current time, favouring currencies where rates are highest and are likely to stay higher for longer.

Given the scope for the RBNZ to lead the cutting cycle, "the outlook looks worse for the Kiwi," says Capital Economics.

For their part, Kiwibank also anticipates NZ Dollar weakness as the RBNZ responds to a sluggish economy with interest rate cuts.

"Our forecast for the Kiwi dollar is sharply unchanged at 55c by year-end (if it ain't broke, we won't fix it). And we have grown in our conviction. Falling commodity prices, narrowing interest rate differentials, and weakening risk appetite should see it through," says Kerr.

Against the Pound, Kiwibank Senior Dealer Hamish Wilkinson expects a test of the recent low at 0.4822 NZD/GBP prior to a move towards the 2020 low at 0.4753.

This amounts to an up move in the Pound to New Zealand Dollar exchange rate (GBP/NZD) through 2.07 to 2.10.

Two other drivers of expectations for NZD weakness are the slow rebound in the Chinese economy and New Zealand's current account deficit which is 8.5% of GDP as a result of New Zealand importing more than it exports, although Kiwibank expects the deficit position to improve from here as post-pandemic shocks ease.