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New Zealand recession: Reserve Bank on hiding to nothing as rate rises to fight inflation squeeze growth

By Ryan Hogg

Edited by Jekaterina Drozdovica

09:25, 8 November 2022

Flag of New Zealand on the mast
Reserve Bank of New Zealand on hiding to nothing as rate rises to fight inflation squeeze growth Photo: Creative Photo Corner / Shutterstock

New Zealand’s economy has been historically good at weathering economic storms, from the Great Recession to Covid-19.

But the country’s economy is facing big inflationary headwinds, which the central bank is fighting with a tactic of interest rate hikes. Is the next New Zealand recession coming? 

What is a recession?

A common rule of thumb for defining a recession is two consecutive quarters of negative gross domestic product (GDP) growth. There are other ways of identifying a recession across countries, such as the US’s designation of announcing a recession to the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, which takes several indicators into account to judge the state of the economy. 

While a seemingly inconsequential, and overtly macro, way of defining a downturn, recessions signify impacts in several areas of the economy. Consistent periods of negative economic growth suggest an endemic issue with low demand in the economy, which has widespread impacts on most people's lives.

Recessions can be set off by financial crises, such as the subprime mortgage crisis of 2008, or as a result of a dip in the business cycle, as appears to be the case in the current context, when interest rate rises could cause the next recession in New Zealand.

Central banks raise interest rates to quell inflationary pressures after a period of high demand, which stimulates economic growth. These hikes make borrowing and investing more expensive, while making saving more attractive, reducing liquidity in the system. It also increases the costs households experience servicing their debt, including their mortgages, which brings down disposable income that can be spent elsewhere in the economy.

Recessions are often followed by job cuts across the economy as a result of falling demand and rising costs. Eventually, when demand has fallen to some form of equilibrium, interest rates fall again and a growth period eventually resumes. 

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New Zealand’s recession history

New Zealand’s recession history has been notable for the relative tameness of contractions. While the country has experienced four recessions since 1988, all have been relatively shallow.

For example, during the great recession of 2008/09, New Zealand experienced a relatively mild downturn. World Bank data showed that the economy contracted by 1.1% in 2008 and 0.1% in 2009

New Zealand’s GDP growth rate, 1988 - 2022

“In New Zealand and Australia, problems in the core banking system during the crisis were comparatively mild, reflecting our more vanilla-flavoured banking sector and relatively sound bank capital structures,” Tim Ng and Dr Alan Bollard said in a speech delivered to the Australian National University in Canberra in 2012, explaining the country’s shielding from the worst of the recession.

The last New Zealand recession came as the Covid-19 pandemic swept across the globe in early 2020, forcing widespread lockdowns and huge restrictions on economic activity. GDP contracted by 1.1% in the first quarter of 2020, before a huge 10.4% contraction in the second quarter. 

New Zealand’s strict approach to containing the virus, which included largely shutting down its borders, helped the country’s economy quickly return to normality, and it returned to pre-Covid size in the third quarter of 2020 with 13.7% growth.  

The economy has moved in fits and starts since, experiencing a few one-off quarterly contractions, but not enough to signal a recession in New Zealand.

Is New Zealand in a recession right now?

A New Zealand recession has so far been avoided in 2022. The country saw GDP growth fall by 0.2% in the quarter to March 2022, before rebounding in the next quarter to grow by 1.7%. But that looks likely to change as the country’s central bank fights multiple fires.

The key fire is inflation. New Zealand’s consumer prices index (CPI) rose by 7.2% in September 2022, a slight fall from August’s CPI of 2022, according to Stats NZ

New Zealand’s inflation rate, January 2020 - September 2022

Like most of the world, the country is struggling with the ramifications of a shock to energy prices as the consequences of major oil exporter Russia’s invasion of Ukraine. That added to the effects of Covid-hit global supply chains, which failed to keep up with pent-up demand and strong liquidity in the financial system.

Prices in the country have been driven by food, transport and household utilities, reflecting the underlying pressure evident in input costs.


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That has pushed New Zealand’s central bank, the Reserve Bank of New Zealand (RBNZ), into action. The official cash rate began the year at 0.75% as the central bank began lifting lending rates from Covid-era lows of 0.25%.

Most recently, on 5 October 2022, the bank raised rates by a further 50 basis points to 3.5%, its fifth hike in eight meetings this year, as it highlighted that despite falling oil prices, core inflation remained stubbornly high. 

There is a broad expectation that the cash rate will go beyond 4%, with the RBNZ guiding markets in that general direction. Analysts expected that this will inevitably place pressure on the New Zealand economy. 

New Zealand’s Treasury wrote in its latest fortnightly economic update at the end of October:

“The strength of domestic and global inflation pressures continued to surprise analysts. This strength led to further increases in interest rates, raising the risk that a contraction in activity will be required to bring inflation under control.”

The Economist Intelligence Unit in late August predicted that while the economy won’t fall into a recession, interest rate rises will slow economic growth to a “trickle,” with tourism and education income offsetting falls in output. The group wrote:

“The main avenue through which this will be evident is household spending, which accounts for around 60% of GDP. Higher mortgage and loan repayment costs, combined with continued increases in food and fuel costs, will inhibit more discretionary spending.”

The forecaster said that in a downside scenario where the bank raises interest rates above 5%, the economy would indeed tip into recession as “the positive contribution from tourism and education exports would not be sufficient to offset the decline in consumption”.

Likewise, in its latest quarterly economic report from August 2022, ANZ Bank New Zealand wrote that the return of New Zealand’s services exports would help the economy avoid an NZ recession in 2023. Indeed, the bank expected the vast majority of New Zealand’s GDP growth to come from exports over the coming quarters, noting:

“Imports detract from GDP, so with goods exports holding up (subject to weather conditions), this will hopefully keep headline GDP growth from turning negative. But a weaker recovery for international education and tourism alongside a persistently high import dependence could easily see the economy in recession.”

It appears the major risk to New Zealand’s economy is a scenario where its exports bear less fruit next year than hoped.

Impact on New Zealand’s dollar 

The country hasn’t been helped this year as it saw its currency contract against major players. The New Zealand Dollar (NZD/USD) has fallen by as much as 17.6% against the US dollar this year as investors flee to the greenback as a safe haven asset, and hawkish moves by the Federal Reserve (Fed) strengthen its case. 

That can affect the costs of doing business for several sectors in New Zealand by making imports more expensive and hitting the country’s financial sector. 

NZD/USD exchange rate

The currency has rallied in the past month though, rising by 5.4% on the back of a strong bonds market as rumours swirled that trade partner China would soften its zero-Covid policy, rumblings which Beijing swiftly put to bed

New Zealand economy forecasts for 2023 and beyond

New Zealand economy forecasts generally formed the consensus that while activity will be tempered, it will not see the country fall into a recession. But there are outliers.

One of those was the Bank of New Zealand (BNZ), which on 7 November predicted production-based GDP will fall into a minor contraction of -0.2% in Q2 2023 and -0.1% in Q3 2023, signifying a technical recession. BNZ’s scenario suggested interest rates will rise to a peak of 4.5% next year.

ANZ bank predicted gross national expenditure (GDP excluding net exports) to contract by 0.5% next year, but that the return of tourism and education would help the economy slip into contraction.

According to a forecast by Trading Economics as of 7 November, the New Zealand economy was forecast to grow 1.1% in 2023 and by a slightly subdued 0.7% in 2024, avoiding a recession.

Final thoughts

Note that analysts and algorithm-based forecasts about a New Zealand recession may be wrong and shouldn’t be used as a substitute for your own due diligence. Always conduct your own research before trading, looking at the latest news, technical and fundamental analysis and a wide range of expert commentary.

Remember, past performance does not guarantee future returns. And never trade money you cannot afford to lose.


How many recessions has NZ had?

According to World Bank data, New Zealand has experienced four recessions since 1988.

When was New Zealand's last recession?

New Zealand’s last recession was a brief but incredibly steep one in the first and second quarter of 2020, thanks to restrictions implemented to contain the spread of Covid-19.  

Is New Zealand heading for a recession?

Most forecasters mentioned in this article as of 7 November said that New Zealand could avoid a technical recession thanks to its tourism and education sectors, but a fall in domestic consumption may make it feel like one.

Markets in this article

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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