Economists say economy already shrinking, but OCR still likely to rise

The economy is expected to have shrunk at the end of last year, much sooner than Reserve Bank (RBNZ) has forecast.

Gross domestic product (GDP), the broad measure of the economy’s value, is forecast to have contracted between 0.2 and 0.5 percent for the three months ended December. The RBNZ has forecast a rise of 0.7 percent for the quarter.

Manufacturing, construction, retail sales and business activity have all been slowing.

ANZ senior economist Miles Workman said there might be an element of payback for the surprising supersized 2 percent rise in the previous quarter, and the big question was whether the normal summer pattern of holiday spending, tourism, and housing rebound would occur.

Economists were reluctant to suggest one quarter of negative growth was the start of the much-predicted recession – two consecutive quarters of negative growth – which the RBNZ has said is probably needed to cool the economy and tame inflation.

“Whether this is a sign that recession has come upon us earlier than expected is unclear,” Westpac acting chief economist Michael Gordon said.

The RBNZ raised the OCR by 50 basis points to 4.75 percent in February and has been indicating a peak at 5.5 percent towards the end of the year.

ANZ’s Workman said inflation at 7.2 percent remained too high and too stubborn for the RBNZ to halt rate rises for the sake of one quarter of soft growth.