(Bloomberg) — Dozens of empty storefronts in the heart of New Zealand’s capital, Wellington, illustrate the economic gloom spreading across the country.
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Struggling retailers are the most visible sign of sluggish demand that is hitting industries across manufacturing to construction and real estate. Local economists say the economy is heading for its worst year since the global financial crisis 15 years ago, excluding the 2020 pandemic-induced recession.
“There’s a lot of talk about how tough the economy is, how little money there is, how many redundancies there are,” said Carolyn Young, chief executive of industry body Retail NZ. “We’ve had people from retailers say this is the worst feeling they’ve ever had. They can’t see the light at the end of the tunnel.”
The United States emerged from recession with growth of 0.2 percent in the first quarter, but that may only be a temporary lull in a downturn that began 21 months ago and is likely to continue. Consumer and business confidence has been sluggish as central banks keep interest rates high to tame inflation, and economists predict the economy will shrink again in the three months to June.
That represents a contraction in five of the past seven quarters.
The median estimate from a Bloomberg survey of New Zealand’s five largest banks is for average annual growth to be just 0.2% this year, down from 0.6% last year and the slowest rate since 2009 excluding the impact of the coronavirus.
Despite record immigration-fueled population growth over the past two years, the economic slump is taking hold. On a per capita basis, the economy has contracted for six consecutive quarters. Gross domestic product per capita is down 4.3% from its peak in the third quarter of 2022, a larger decline than the 4.2% decline after the global financial crisis.
The central bank has maintained a firm stance that it will not cut interest rates for the next year to ensure inflation is kept under control, but this could change if the economic downturn continues for a long time.
Investors expect rate cuts to start in November this year, with most local economists predicting easing will begin in early 2025. The RBNZ’s forecast is that policy rates will finally start to fall from 5.5% in the second half of next year, but no one is buying it.
“The economy is weak and well into disinflationary territory so it’s safe to expect the OCR cut to come sooner than the RBNZ has suggested,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland.
Outlook shrinks significantly
General retailer Warehouse Group this week sharply cut its profit forecast for this year, saying retail businesses across New Zealand are being pressured by “increasingly weak consumer demand”.
A gauge of activity in the service sector, which accounts for two-thirds of the economy, excluding pandemic lockdowns, fell to its lowest reading since the survey began in 2007. The manufacturing sector has contracted for 15 consecutive months.
Barrister Kevin Sullivan, of Port Nicholson Chambers in Wellington, said many insolvency lawyers and liquidators were busy.
“The dire state of the economy is causing more and more businesses to struggle,” he said. “We expect things to get worse before they get better.”
The unemployment rate is still relatively low at 4.3%, but it is trending upwards, and job ads in May were down 31% from a year ago.
The government has been slashing spending and cutting public sector jobs to rein in debt, with Wellington being hit particularly hard because it is home to tens of thousands of civil servants.
RBNZ chief economist Paul Conway reiterated last week that “a period of tighter monetary policy is needed to give us confidence that inflation will return to our target within a reasonable period of time”.
But he also said policymakers expect the economy to start to have spare capacity through 2024, which will have a “significant” impact on lower domestically generated inflation.
“New Zealand’s economy is weak because of aggressive monetary policy,” said Jarrod Carr, chief economist at Kiwibank in Auckland. “The mantra on the ground is ‘survive to 25’. It’s a constant state of tension.”
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