New Zealand Dollar: Recession to be Confirmed Says BNZ

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Bank of New Zealand (BNZ) expects confirmation next week that the New Zealand economy has entered a recession.

The release of GDP data on Wednesday and current account figures on Tuesday make up the domestic highlight for the New Zealand Dollar which remains a laggard in the global FX space amidst a combination of slowing global and domestic data as well as the Reserve Bank of New Zealand's recent signal that it has ended raising interest rates.

To be sure, hikes in New Zealand's OCR to 5.5% will have provided a significant headwind to economic activity, and given the lagged nature of the impact of interest rate hikes, more pain likely lies ahead.

"NZ business indicators released for Q1 weren't flash and they allowed us to firm up our GDP estimate to a 0.2% q/q decline, following on from the 0.6% contraction in Q4," says Jason Wong, FX analyst at BNZ. "Our estimate is weaker than the RBNZ’s +0.3% pick."

"The standard forecasting error means that either of those two outcomes are both plausible, but clearly a negative outturn would get media writing about the economic recession beginning late last year," says Wong.

He cautions that recessionary conditions are feeding into deteriorating fiscal metrics, including an annual fall in total tax revenue, something usually only seen when tax rates are cut or in economic recessions.

"Despite fresh fiscal projections at last month’s Budget, the deficit is already running $1.3b higher than projected," he says.

Peers at ANZ meanwhile forecast a 0.2% q/q economic expansion for the first quarter, closer to the RBNZ's forecast, but also well within a reasonable range of error which means the official figure could go either way.

Amongst recent economic indicators of concern was this week's Fonterra dairy trade price index which unexpectedly slumped -0.9%, whereas a no-change 0.0% was expected.

This signals a material decline in value for New Zealand's premier foreign exchange earner and further weakness is possible.

Economists at ANZ Bank said today they are lowering their forecasts for New Zealand's milk price forecast for the 2022-23 season by 5c to $8.20/kg milksolid.

"Global dairy markets continue to deteriorate. We do continue to expect to see prices pick up later in the season, just not in time to support our previous milk price forecast," says Susan Kilsby, Agricultural Economist at ANZ.

She adds "the ongoing weakness in the NZD is providing some assistance to farmgate pricing, but the currency remains a risk in both directions, as always."

New Zealand's current account comes into focus next week with data expected to confirm a sizeable deficit remains in place, confirming the country pays out more for goods and services than it receives.

"We have a record current account deficit and we're running Budget deficits for the foreseeable future. In other words, we've been living well beyond our means and it’s not clear that'll change any time soon," says Sharon Zollner, Chief Economist at ANZ.

ANZ's New Zealand Dollar forecasts nevertheless show the domestic currency can recover in the near term as New Zealand's elevated interest rate environment makes money-based assets will remain attractive to international investors.

High rates are a result of RBNZ interest rate hikes that have taken the Overnight Cash Rate - the basis for the pricing of New Zealand rates and yields - to 5.5%.

"Carry has been a key consideration for the Kiwi for decades, thanks to the tendency towards higher interest rates in New Zealand, and a tendency for higher-yielding currencies to appreciate," says Zollner.

But the bank's forecasts suggest the Pound-New Zealand Dollar rate will remain above 2.0 and the prospect of longer-term declines in the Kiwi is a risk.

BNZ's Wong says New Zealand's rising twin deficits position isn't perturbing investors, "with another solid government bond tender and the highest bid/cover for the longest 2037 bonds on offer – the good result owing in part to the cheapening of bonds ahead of the tender."