Venu Menon
Wellington, March 24,2024
Anaemic consumer spending and a slump in wholesale trade and manufacturing have belied signs of recovery over the past year and pushed New Zealand into a recession.
The Reserve Bank of New Zealand (RBNZ) is faced with reviewing its latest monetary policy statement indicating there would be no rate cuts until mid-2025.
Latest Stats NZ data show gross domestic product (GDP) – or total economic output – fell 0.1% in the three months ending December 2023. The economy contracted 0.3% in the previous three months until September 2023 as well.
Two consecutive quarters of negative growth mean the country is technically in a recession.
Businesses and households are bracing for the impact of the back-to-back dip in GDP over two quarters.
The New Zealand economy is buoyed by exports of primary products – such as dairy, kiwi fruit and meat – which account for about 6% of GDP. Industries and manufacturing make up 20% while services account for 66%.
The RBNZ relies on GDP numbers to make its determination on raising or lowering interest rates.
Says Ruvani Ratnayake, senior manager, national accounts industry and production: “Wholesale trade was the largest downwards driver this quarter, led by falls in grocery and liquor wholesaling; and machinery and equipment wholesaling.”
Retail trade activity also fell, driven by furniture, electrical, and hardware retailing; and food and beverage services, Ratnayake adds.
An unclear variable is the role of migration.
According to the bank’s Monetary Policy Committee: “Net immigration increases both the supply of labour and demand in the economy.”
The committee notes that “past empirical research on the New Zealand economy have found that the demand impact is greater than the supply impact, particularly in the short term. For this reason the Reserve Bank has tended to assume that positive net migration adds more to aggregate demand than aggregate supply, and therefore increases inflationary pressure.”
But the impact of temporary migrants on the economy – such as students with work visas, seasonal workers coming into the country under the Recognised Seasonal Employer and working holiday schemes – are not covered by the Stats NZ data.
The RBNZ is also cognizant that the easing of travel restrictions has spurred trans-Tasman migration with many Kiwis leaving New Zealand to work in Australia, which offers higher per capita GDP.
While central banks around the world say immigration adds to labour supply and drives wages down, there is little data to indicate that this is the case in New Zealand.
The bottom line is that the RBNZ has limited data on the net impact of migration on the New Zealand economy in general and on inflation in particular, and is not in a position to articulate a clear monetary policy response to immigration.
Venu Menon is an Indian Newslink reporter based in Wellington
