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New Zealand’s economic landscape has taken an unexpectedly shocking turn in the third quarter of this year, with the gross domestic product (GDP) contracting by 0.3 per cent, contrary to analysts’ projections of a 0.2 per cent rise. This unexpected downturn has raised grave concerns about the broader implications for the country’s economic well-being. In theory, this contraction means a definitive decline in the standard of living.

The decline in GDP was broad-based, affecting all goods-producing industries, with manufacturing experiencing a notable fall, according to StatsNZ. This unexpected setback follows a revised 0.5 per cent increase in the second quarter, leading to an annual GDP decrease of 0.6 per cent, in stark contrast to the anticipated 0.5 per cent rise.

Despite the overall economic contraction, certain sectors demonstrated resilience, with growth observed in eight out of the country’s 11 industry categories. Notably, healthcare and social assistance, along with rental, hiring, and real estate services, experienced robust expansion during the quarter.

The Reserve Bank (RBNZ) had projected a more optimistic quarterly growth of 0.3 per cent, but the weaker-than-expected GDP aligns with the central bank’s ongoing efforts to curtail inflation. The RBNZ, implementing its most assertive policy tightening since 1999, has raised the official cash rate by 525 basis points since October 2021, reaching a whopping 5.50 per cent. This contraction in GDP may align with the RBNZ’s objectives, as it seeks to temper economic growth to mitigate inflationary pressures.

The unexpected downturn has also prompted a revisiting of past quarters, revealing that NZ actually entered a recession earlier in the year, with two consecutive quarters of contraction – previously unacknowledged. A notable revision of second-quarter growth from 0.9 per cent to 0.5 per cent underscores the severity of the economic challenges facing the nation.

Migration played a crucial role in mitigating the impact, with GDP per capita falling by 0.9 per cent in the third quarter of 2023. Without the influx of migrants, the contraction would have been even more pronounced, underscoring the significance of demographic shifts in shaping economic trends.

Critics argue that the economic mismanagement by the government has exacerbated the downturn. In just three months to September, GDP per capita plummeted by 0.9 per cent, marking the fourth consecutive quarter of decline. The spectre of a per capita recession is now looming large, raising questions about the long-term impact on the standard of living for Kiwis.

In response to the economic challenges, the RBNZ has employed aggressive measures, elevating interest rates to rein in inflation. The central bank’s November signal that it may further increase rates if inflation remains unbridled underscores its commitment to maintaining price stability.

As the nation grapples with this unforeseen economic contraction, there are growing calls for a re-evaluation of government policies. Critics argue that a purportedly anti-growth stance, characterised by stifling innovation and growth, has contributed to the current economic predicament. Urgent calls for reducing the cost of government and dismantling regulatory barriers have gained momentum, with proponents contending that such measures are essential for revitalising NZ’s economic prospects.

In the face of this economic challenge, the imperative for a strategic and comprehensive response is clear. The unexpected contraction serves as a stark reminder of the interconnectedness of economic policies and their real-world consequences. The diverse sectoral impacts of this downturn, coupled with the RBNZ’s assertive measures, highlight the complexity of managing inflation and economic growth.

As the new National-led coalition government charts its course forward, a balanced approach that addresses both short-term challenges and long-term structural reforms will be essential to foster resilience and sustainable growth.

To its credit, the government has begun in right earnest by returning the RBNZ to its single mandate of controlling inflation removing the additional responsibilities of exercising control on unemployment rates, mandated by the previous government.

New Finance Minister Nicola Willis has also shown definitive purpose by showing a resolve to take drastic decisions when necessary, as in the case of reversing the decision to fund the infrastructure for KiwiRail’s Cook Strait ferry services to contain in what was widely expected to blow the budget.