New Zealand’s economy exited recession, with modest expansion in the first quarter.

Gross domestic product (GDP) gained 0.2% from the previous quarter, when it declined 0.1%, Statistics New Zealand said on Thursday in Wellington. Economists expected 0.1% growth. GDP rose 0.3% from the year-earlier quarter, beating the 0.2% estimate.

The economy is struggling, as the Reserve Bank of New Zealand (RBNZ) keeps its key interest rate at 5.5%, the highest since 2008, to bring inflation back under control. While strong immigration and a tourism recovery are aiding activity, steep borrowing costs are curbing consumer spending and business investment. 

“We expect growth to remain minimal over the course of this year,” said Michael Gordon, a senior economist at Westpac in Auckland. “Recent indicators suggest that the June quarter is shaping up to be quite soft.”

The New Zealand dollar rose after the report before retracing to trade little changed. It bought 61.32 US cents at 1.30pm in Wellington. Bond yields and swap rates gained.

Despite the GDP result, which matched the RBNZ’s forecast, the economy has only grown in two of the past six quarters. 

The central bank nevertheless signalled last month that it didn’t intend to lower rates until the second half of 2025, citing stubborn core inflation. 

RBNZ chief economist Paul Conway said on Wednesday that the economic slowdown caused by tight monetary policy is necessary to bring inflation back into the bank’s 1% to 3% target band, which it expects to happen later this year. 

“We are in a slow to negative growth environment, but the outlook for growth is slightly more positive going forward, and the outlook for inflation is for declines to continue,” he said. “We are experiencing some short-run pain. The idea is that the gain from low and stable inflation is going to be worth it.”

Most economists are tipping the first rate cut in the final months of 2024 or early 2025. Investors have fully priced in a 25-basis-point cut to the official cash rate (OCR) by November, according to swaps data.

The main drivers of first-quarter growth were a lift in tourist spending and increases in dairy and forest output, the statistics agency said. Eight of 16 industries showed an increase in production. Manufacturing and construction declined.

GDP per capita shrank 0.3% from the fourth quarter, its sixth straight quarterly decline.

“Today’s release doesn’t change the fact that economic momentum is anaemic, particularly from the domestic demand and per capita perspectives,” said Miles Workman, a senior economist at ANZ Bank in Wellington. “We remain comfortable with our OCR call for cuts from February 2025.”

  - Bloomberg