New Zealand’s economy rebounded in the second quarter as tourists returned

New Zealand’s economy rebounded in the second quarter as tourists returned

by Wayne Cole

SYDNEY (Reuters) – New Zealand’s economy rebounded sharply in the last quarter as the lifting of coronavirus restrictions and the return of tourists helped avert a recession, although it could be the last spur to solid growth as demand for interest rates increases.

Official data released Thursday showed gross domestic product rose 1.7% in the June quarter, beating expectations for a 1.0% gain and a timely recovery from the first quarter’s 0.2% decline.

Annual growth slowed to just 0.4%, but that was biased due to the timing of the various shutdowns and the main message was that the economy was operating with little excess capacity and mounting cost pressures.

The Reserve Bank of New Zealand (RBNZ) has already raised interest rates by 275 basis points to 3.0% and believes it will have to reach at least 4.0% to slow demand enough to contain inflation.

Markets have priced the other increases to almost entirely 4.25% as consumer price inflation hit a three-decade peak of 7.3% in the June quarter and the labor market remains tight.

The opening of the country’s borders only increased demand as tourism spending jumped 157% from the first quarter.

โ€œFamilies and international visitors are spending more on transportation, lodging, dining out, sports and leisure activities,โ€ said Rovani Ratnayake, senior director of industry and production at Stats NZ.

All the growth was concentrated in the services sector with household spending on goods actually dropping in the June quarter. This helped lift the measure of spending from GDP by 2.1% on the quarter.

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Price metrics in the GDP report were also hot with inflation for business investment, home construction and the like at 6.4% in the year to June.

While gasoline prices have fallen in the past two months, food prices have risen amid poor growth conditions and higher production costs.

The government’s measure of food prices rose 8.3% in the year to August, the largest increase in 13 years.

One price that is falling is home prices, where higher borrowing costs have burst the huge bubble that has grown during the pandemic, sending values โ€‹โ€‹down 6% in August from the previous year.

โ€œMore importantly, the contraction in the housing market signals a period of broader weakness in household demand,โ€ said Michael Gordon, acting chief economist at Westpac Inc.

โ€œWith more signs of a demand weakening increasingly visible, we expect the RBNZ to become increasingly comfortable that monetary tightening will have the desired dampening effect.โ€

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