New Zealand Dollar Welcomes End to Recession

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The New Zealand Dollar is one of the better performers on the day, with markets welcoming some stronger-than-expected growth data.

The Pound to New Zealand Dollar exchange rate experienced a slight dip amidst an NZD rebound after StatsNZ announced a 0.2% increase in GDP in the first quarter. This broke a streak of quarterly GDP declines that had led to the country's recession in the second half of 2024.

"NZD/USD spiked modestly after New Zealand GDP expanded by 0.2%/qtr compared to consensus expectations of 0.1%/qtr," says Joseph Capurso, a strategist at Commonwealth Bank. "New Zealand’s recession is now over, albeit only just."

The improved growth performance, on the margin, lowers the odds of an early Reserve Bank of New Zealand (RBNZ) interest rate cut, which can underpin the NZ Dollar. "NZD had a kneejerk upside reaction following better than expected New Zealand Q1 GDP growth," says Elias Haddad, Senior Markets Strategist at Brown Brothers Harriman.

The NZ Dollar has been one of the G10's best-performing currencies over the past two months, helped in part by expectations that New Zealand's interest rates won't fall as fast as those elsewhere.

That said, economists at ASB say the GDP report is not a game-changer for the RBNZ. After a prolonged period where demand exceeds supply, demand must remain below the economy’s productive capacity for some time to rebalance the economy and help bring inflation sustainably back to target.

ASB expect interest rate cuts from early 2025. "By then they expect the RBNZ will have enough evidence that a weaker economic backdrop (and a looser labour market) will flow through to inflation settling sustainably around the midpoint of the 1%/yr‑3%/yr inflation target," says Capurso.

A 2025 rate cut would confirm that the RBNZ is among the last to cut interest rates, which suggests that the New Zealand Dollar can continue to rely on support via the relative interest rate channel.