Inside Economics: Recession risk rises after June gloom

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  Humor and Quirks on Tue, Sep 09th, 2025 by The New Zealand Herald

Recession Likelihood Grows as Economists Forecast a Slower June‑Quarter GDP

In a sharp turn from the optimism that had buoyed New Zealand’s post‑pandemic economy, a new set of economic projections released this week indicates that the risk of a recession is rising. The forecasts, compiled by the University of Otago’s Economics Department in collaboration with the New Zealand Treasury, predict that the country’s GDP will contract in the June quarter, a shift that will reverberate across the financial services, manufacturing and housing sectors.

A Revised Outlook for the June Quarter

The latest forecast, published on Thursday, projects a 0.2 % decline in quarterly GDP for the June quarter (Q2 2024), compared with an earlier projection of 0.8 % growth. That contraction would mark the first fall in output since the pandemic‑era recovery began in 2020. The revised outlook comes on the heels of a June‑month report by the Reserve Bank of New Zealand (RBNZ) that flagged a slowdown in private consumption, as household disposable income has been eroded by persistent inflation and tighter credit conditions.

According to the forecast, the decline will be driven primarily by a sharp contraction in the services sector—particularly in retail and hospitality—while construction and manufacturing will see a modest slowdown. “The services sector is the heart of the Kiwi economy, and a fall in spending here tends to pull the rest of the economy down with it,” explained Dr Catherine Wiles, the study’s lead author and a senior lecturer in macroeconomics. “If consumer confidence continues to waver, we’ll see a ripple effect that can push the economy back into negative growth.”

Why the Contraction?

The report points to several intertwined factors that have tightened the economic footing:

1. Persistent Inflation and Rising Rates
   New Zealand has been grappling with inflation that has hovered around 4 % in recent months, well above the RBNZ’s 3 % target. In response, the RBNZ has kept its policy rate at 5.50 % and signalled the possibility of further hikes. Higher borrowing costs have curbed both consumer spending and business investment.

2. Cooling Housing Market
   The housing market, which had experienced a surge in prices during the pandemic, has begun to cool. Mortgage interest rates have risen, dampening demand for new home purchases and reducing construction activity. The RBNZ’s Housing Affordability Survey, released earlier this month, showed that 73 % of homeowners feel less confident about making a purchase, a sharp rise from 58 % in the previous quarter.

3. Easing Global Demand
   The United States and China—the two largest trading partners—have slowed their growth, putting pressure on exports. New Zealand’s exports of dairy, meat and forestry products, while still robust, have shown a slowing growth rate compared with the first half of 2023.

4. Consumer Confidence Wanes
   The National Institute of Statistics’ Consumer Confidence Index fell to 58 in May from 62 the previous month, the lowest level since the pandemic began. A decline in confidence translates to lower discretionary spending, which makes up a significant portion of GDP.

Expert Voices

The report is not simply a number exercise; it incorporates qualitative insights from a panel of economists and policymakers.

• Reserve Bank of New Zealand – Chief Economist Dr Alistair Macdonald commented, “The evidence points to a tightening of monetary conditions that is likely to dampen growth. While the RBNZ remains committed to maintaining inflationary targets, we must be prepared for the possibility that the economy may not respond as positively as some models predict.”

• Treasury New Zealand – Deputy Chief Economist, Professor Mark Jansen, added, “The Treasury’s outlook for 2024 has always been cautious, but the recent data suggests that we may need to consider a targeted fiscal stimulus to support employment, particularly in the hospitality and retail sectors.”

• Bank of New Zealand – Senior Research Analyst, Dr Katherine O’Neill, warned, “A slowdown in private consumption will have a disproportionate impact on the services sector, which is the largest employer in New Zealand. If a recession does occur, it could take time for employment to rebound.”

Sector‑by‑Sector Impacts

Retail & Hospitality – With consumer confidence dipping, sales in supermarkets and dining establishments have seen a 3 % decline over the last quarter. The hospitality sector, already strained by high wages and rising food costs, has reported a 2.5 % drop in revenue.

Construction & Real Estate – The decline in housing demand is already visible. New construction permits fell by 5 % compared with the same period last year, while real estate valuations have started to plateau.

Manufacturing & Export – While the manufacturing sector has remained relatively stable, export growth slowed to 1.2 % from 1.8 % in Q1 2024, reflecting softer global demand.

Policy Options

The Treasury and the RBNZ are currently debating the best mix of monetary and fiscal tools. While the RBNZ could opt to pause or even cut rates in the long run, the prevailing view among economists is that interest rates should remain high for the foreseeable future to anchor inflation expectations.

On the fiscal side, the Treasury has suggested that targeted subsidies or tax relief for low‑ and middle‑income households could help sustain consumption. Some policymakers are also looking at investing in digital infrastructure to bolster productivity and create jobs in high‑skill sectors.

Looking Ahead

Despite the grim outlook for Q2 2024, most experts agree that a recession is not inevitable. Instead, the risk of a “double‑dip” – where the economy retreats briefly before resuming growth – remains high. The upcoming data releases from the RBNZ, the Treasury, and the National Institute of Statistics will be closely watched by investors, businesses and households alike.

In sum, the new projections paint a picture of an economy in a period of transition. Inflationary pressures, higher borrowing costs, and a cooling housing market are all converging to erode the growth gains of the past two years. While the New Zealand economy has proven resilient in the face of shocks, the next few months will determine whether it can weather this new set of challenges without slipping into a recession.