The 2023 New Zealand recession: Here’s what ASX investors need to consider

A New Zealand recession has been feared for months, but is not yet official – at least in a technical sense. There have been two consecutive quarters of negative growth on the other side of the Tasman.

What does it have to do with the ASX you may ask? Well it might impact the four dozen or so ASX companies that are from New Zealand. And for the rest, it could provide a hint of what could be to come in Australia.

 

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A New Zealand recession is official

New Zealand’s GDP contracted by 0.7% in the December quarter of 2022 and a further 0.1% in the March quarter. With high employment levels, it’s difficult to put principal blame any other catalyst than their Reserve Bank’s interest rate hikes. Inflation and Cyclones Hale and Gabrielle have hurt too.

Economists on the other side of the Tasman expect things to get worse before they get better as the labour market loosens and consumer demand continues to fall.

This will be bad news for consumer discretionary stocks in New Zealand, particularly those that endured heavy demand during the COVID years. It may also be bad news for the Big Four banks – particularly ANZ (ASX:ANZ) which is arguably the most reliant on New Zealand given it has a 30% share there and trades in its own right, rather than operating a subsidiary as CBA does with ASB.

 

Is Australia next?

It is anyone’s guess. There are many parallels between Australia and New Zealand. However, there are some differences across the Tasman.

Their central bank began the rate hiking cycle over 6 months before Australia did and has rates now at 5.25%.

The Aussie economy has not been hit by Cyclone Gabrielle. And the roll over of fixed rate mortgages to variable rates will occur more gradually, given most Kiwi mortgages are fixed for 2 years.

The Australian economy might be better off than New Zealand over the next couple of years, even if it does ultimately enter a recession too.

But for investors (as opposed to short-term day traders) whether or not a technical recession occurs isn’t really important. What matters is that companies can protect their margins, raising prices while still maintaining demand.

Companies that can will inevitably do better than those that do not.

 

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