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New Zealand Slips into Recession as Economy Shrinks in First Quarter

Wellington, June 15 - New Zealand's economy slipped into a recession in the first quarter as data revealed a contraction, reducing the likelihood of further interest rate hikes by the central bank but posing a challenge to the government's re-election prospects.

Gross domestic product (GDP) in New Zealand contracted by 0.1% in the March quarter, in line with analysts' expectations but falling short of the Reserve Bank of New Zealand's (RBNZ) forecast of 0.3% growth. Additionally, the fourth-quarter GDP figures were revised, revealing a contraction of 0.7% compared to the previously reported decline of 0.6%. Following the release of the data, the New Zealand dollar dipped 0.2% to $0.6197. The figures aligned with market expectations and supported the central bank's stance that no further interest rate hikes would be necessary.

The weakness in the economy was widespread, with output from half of the country's industries experiencing contraction, according to data from Statistics New Zealand. The impact of two major cyclones and flash floods in Auckland during January and February contributed to the decline in growth.

"It's clear that the New Zealand economy is losing momentum," noted Westpac senior economist Michael Gordon in a statement. "What remains to be seen is whether things have slowed enough to put us on a path back to low and stable inflation."

Despite the economic downturn, employment in New Zealand remains strong, mitigating the effects of the recession for many individuals. However, with the country heading towards an election in October, the recession has become a significant political issue as voters grapple with higher living costs.

Inflation in New Zealand is currently at 6.7%, significantly exceeding the central bank's target band of 1% to 3%. Economists believe that signs of slowing momentum will be welcomed by the central bank, which has been pursuing an aggressive policy tightening since 1999 to rein in inflation. The cash rate, which now stands at 5.5%, its highest level in 14 years, has been raised by 525 basis points since October 2021. The central bank indicated in its May meeting that the cash rate has now peaked.

While the technical definition of a recession requires two consecutive quarters of contraction, the economic downturn in New Zealand poses challenges for the upcoming election and highlights the concerns of voters regarding rising living costs. The central bank's focus on curbing inflation remains a top priority as it navigates the country's economic landscape.

The New Zealand government, along with the central bank, will closely monitor economic indicators and implement appropriate measures to revive growth and address the challenges posed by the recession.

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