WELLINGTON: New Zealand’s economy missed forecasts for growth in the fourth quarter and instead shrank 0.6%, official data showed on Thursday (March 16), raising hopes in the market that the central bank will scale back planned interest rate increases.

Gross domestic product (GDP) failed to meet analysts' expectations of a 0.2% contraction in the December quarter and was well below the Reserve Bank of New Zealand's (RBNZ) forecast of 0.7% growth. It was a reversal from revised growth of 1.7% seen in the third quarter.

Annual growth slowed to 2.2%, as primary industries and manufacturing sectors shrank.

Westpac NZ acting chief economist Michael Gordon said the data showed the economy was “substantially less stretched” than the RBNZ had thought and “that matters for how much of a slowdown is needed to bring inflation back under control”.

The New Zealand dollar was down before the data but extended the fall to be off 0.6% at $0.6145. Two-year swaps are near a two-month low of 4.925% having fallen sharply overnight as bank worries drove bond yields down globally.

New Zealand bank bill futures have surged as the market priced in a lower peak for RBNZ rates. The market is now 50-50 on whether the RBNZ increases 25bp in April, while the terminal rate is seen at 5.11% rather than the bank's projection of 5.5%.

The RBNZ has undertaken its most aggressive policy tightening since 1999, when the official cash rate was introduced, lifting it by 450 basis points since October 2021 to 4.75%.

RBNZ governor Adrian Orr has said he is trying to engineer a shallow recession in an effort to dampen inflation, and the central bank has forecast an interest rate peak of 5.5% in the third quarter of 2023.

Before the fourth-quarter GDP figures were released, the central bank and Treasury forecast the country would enter a recession in the second quarter of 2023.

That could now occur by the first quarter, assuming GDP growth remains negative at a time when severe weather events in January and February hurt the services sector. – Reuters