Wellington (Reuters) – The economy of New Zealand grew faster than expected in the second quarter of the current fiscal, backed by a pick-up in the services sector. New Zealand has also been recently able to narrowly dodge a technical recession.
Both the news are seen as a sigh of relief for its government which is under a heavy attack from the opposition, for its handling of the economy, ahead of the elections. Though, this might be a good news for the government to show off its performance, it is surely a sign of worry for the central bank which had waged a war against rising inflation.
The central bank of New Zealand may be worried of the faster than expected economic growth, which has maintained the point of slower growth to reduce the inflation. However, the current situation means it would have to raise the interest rates further, that could lead them to their 14-year high.
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Official data: New Zealand economy grew faster than expected
Official data released on Thursday revealed that the economy of New Zealand grew by 0.9% in the second quarter ending in June, much faster than expected by the economists. This expanded growth has been followed by a flat 0% growth in the previous quarter, just shy of a technical recession.
Moreover, the annual growth also increased to 1.8%, more than the original expectations of 1.2%, according to the statistics.
This news prompted the New Zealand dollar to hit an intraday high of $0.5952 initially, but as the day progressed it was down by 0.3% to $0.5913 as the US dollar strengthened. Two year swap rates also increased 12 bps to 5.745%, highest in 15 years, but this was partly due to a hawkish Federal Reserve.
According to Statistics New Zealand, the growth in the services sector was particularly strong, largely derived by huge demand for computer system design. Whereas, the manufacturing system benefited from a rebound after the cyclone Gabrielle.
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What’s next?
The ruling labour party, which is struggling in the polls to be held in three weeks, was pleased with the unexpected turnaround in the economy. Finance minister Grant Robertson told Reuters that, “It’s a victory for the New Zealand economy and for the people who work hard every single day to deliver high quality jobs.”
The economic growth has remained the center of the theme in this year’s election with the opposition criticizing the government for high inflation in the country.
As per ASB economists, “Present headwinds in the economy means we can still expect the pace of activity to decline over the course of the next year. However, the continued resilience of the New Zealand economy reflects the risk that OCR (official cash rate) settings will need to remain tight for a long period to get inflation back into target.”
The Reserve Bank of New Zealand has been forecasting that the economy would fall into a recession in the second half of 2023. Therefore, it has taken the most hawkish policy since 1999 when the official cash rate was first introduced.