We Have A Higher Hill, But We're Falling Faster. We're Snowballing.

• Yes, the 1% quarterly decline in activity is huge. And it’s much weaker than anyone had anticipated. But the overall size of the economy since the last checkup (Q2) is little unchanged. In fact, the economy is slightly larger (0.4%) than previously estimated. Basically, off a stronger starting point we are now seeing sharper declines in activity. It’s a snowball effect.
• Excluding Covid periods, the Kiwi economy recorded the weakest 6month period since 1991. And weakness is spreading across most industries.
• The light at the end of the tunnel is upon us. The September quarter should mark the final quarter of the economy in decline for this cycle. The additional 100bps of cuts that took place over the December quarter should provide some relief to the Kiwi economy in the current quarter. And with further cuts to come, 2025 should be a much better year. High interest rates have hurt, and the economy demands more easing.

The Kiwi economy contracted a hefty 1% over the September 2024 quarter. And last quarter’s -0.2% contraction was revised to a significantly weaker 1.1%. Compared to the RBNZ’s and market consensus of another -0.2% contraction, or a -0.3% contraction that we had expected to see, the 1% fall in the economy may seem to set off immediate alarm bells. But reader beware, the larger falls have not changed the overall size of the economy. Methodological changes from StatsNZ in their GDP calculation have seen historical prints revised upwards over a longer period in previous quarters. And those tweaks have balanced out the bigger falls in the June and September 2024 quarters seen today. Essentially, the end point of the economy is not too different from what was originally published in June. But the path in getting there has changed. Technical recessions bookending 2023 have been technically revised away. The economy was stronger than originally thought in the earlier parts of the past year. But now, we are facing much sharper declines. Nonetheless, the actual size of the economy is still 0.4% larger than what was published for the June 2024 quarter, given recent revisions to data prior to Q2.

The economy may be marginally bigger than previously estimated. But that’s not to say we’re in a much better place. Because excluding covid periods, the past 6 months have been the weakest 6-month period since June 1991! And weakness is broad-based. 11 of the 16 industries reported declines over the September 2024 quarter. At the same time, the per capita breakdown continues to deteriorate – despite a significant cooling in net migration. On a per person basis, the economy contracted 1.2% over the quarter, and 2.7% over the year. Per capita output has been shrinking since the December 2022 quarter. That’s eight straight quarters in decline, with a cumulative drop of 4.8% - far deeper than the 4.2% during the GFC.

All up, things are really ugly on the ground. It might be a good time to remember that we had flagged the RBNZ had potentially over-tightened. Today’s release, coupled with a faster than expected deceleration in inflation suggests as much. Aggressive on the way, up, they’re shaping up to be aggressive on the way down. Today’s release of yesterday’s data supports the (largely baked in) 50bp cut to the cash rate in February.

Today’s report was a dim read, no doubt. But there is good news coming. The September quarter should mark the final decline in economic output in this cycle. And with an extra 100bps of cuts over the December quarter, Q4 should be a better quarter. Though with rates still well above neutral we’re not expecting anything that will shoot the lights out. We still have a bit of time (and more rate cuts to come) before the Kiwi economy regains momentum. But our outlook for 2025 is positive.

© Scoop Media