The New Zealand economy slipped into a technical recession for the first time in a decade as economic growth deteriorated throughout the first half of 2008. GDP fell 0.3% in the first quarter, and was followed by a 0.2% decline in the second quarter, which fueled expectations that the Reserve Bank of New Zealand will opt to lower the benchmark interest rate further as economists expect the downturn in the economy to continue throughout the rest of the year.
New Zealand Falls Into A Recession, Growth Fears to Drag Kiwi Lower
Fundamental Outlook For New Zealand Dollar: Bearish
- New Zealand Economy Falls Into Recession
- RBNZ to Lower Rates Further
The New Zealand economy slipped into a technical recession for the first time in a decade as economic growth deteriorated throughout the first half of 2008. GDP fell 0.3% in the first quarter, and was followed by a 0.2% decline in the second quarter, which fueled expectations that the Reserve Bank of New Zealand will opt to lower the benchmark interest rate further as economists expect the downturn in the economy to continue throughout the rest of the year.
At the September 10th board meeting, RBNZ Governor Alan Bollard surprise the markets by cutting 50bp to lower the benchmark interest rate to 7.50 amid expectations of a 25bp reduction. It has become quite clear the larger than expected rate cut was needed as the economy slipped into a recession, and the central bank could be forced to leave inflationary concerns on the backburner as economic activity falters. Mounting growth concerns has raised projections that the RBNZ will take the necessary steps to bring the economy out of a recession as overnight index swaps show that market participants expect the central bank to cut nearly 150bp over the next 12 months. Despite the overwhelming concerns for the economy, the New Zealand dollar has held up fairly well throughout the week considering the repercussions of a recession.
However, downside pressures for the Kiwi could increase over the following week as the trade deficit is anticipated to widen to -912.0M from -781.0M in July. Meanwhile, a fall in business confidence paired with lower commodity prices would also limit the appeal of the New Zealand dollar as agricultural exports are one of the main drivers of growth for the economy. As exports account for nearly 20% of GDP, fading demands for the global economy could drag the New Zealand dollar lower as market participants raise bets that the central bank will cut another 50bp at their October 22nd meeting. Nevertheless, if the U.S. Congress is able to pass the Bush Administration’s bailout plan over the weekend, traders may turn a blind eye to the fundamental events scheduled for the following week, and may spark heavy buying pressures for the high yielding currency in the near-term. - DS
