(Bloomberg) -- In downtown Wellington, New Zealand’s capital city, dozens of empty shops speak to an economic gloom that’s pervading the entire country.

Struggling retailers are the most visible sign of a sag in demand that’s hitting multiple industries, from manufacturing to construction and real estate. Barring the pandemic-induced slump in 2020, the economy is heading for its worst year since the Global Financial Crisis 15 years ago, according to local economists.  

“There’s a lot of talk about how difficult the economy is, how little money there is, the number of redundancies,” said Carolyn Young, chief executive of trade body Retail NZ. “I have had retailers say it feels the worst they’ve ever felt, and we can’t see the light at the end of the tunnel.”

While the nation exited recession with 0.2% growth in the first quarter, that may prove to be a temporary reprieve in a downturn that started 21 months ago and looks likely to continue. With consumer and business confidence in the doldrums as the central bank keeps interest rates high to beat inflation, economists predict the economy will shrink again in the three months through June. 

That would mean contractions in five of the past seven quarters. 

Annual average growth will be just 0.2% this year, according to the median estimate in a Bloomberg survey of the five main New Zealand banks, down from 0.6% last year and the weakest since 2009 excluding the Covid-19 shock. 

The economic malaise has taken hold despite strong population growth over the past two years due to record immigration. On a per capita basis, the economy has shrunk for six straight quarters. Gross domestic product per person is down 4.3% from a peak in the third quarter of 2022, which is more than the 4.2% fall after the GFC.

While the Reserve Bank is talking tough, saying it won’t cut rates for another year to be sure inflation is vanquished, the protracted period of economic lethargy could see it change its tune. 

Investors are betting that rate cuts will start in November this year, and most local economists predict easing will begin in early 2025. None buy the RBNZ’s projections that the Official Cash Rate will only start to decline from 5.5% in the second half of next year.

“The economy is soft and well into disinflationary territory, and we’re comfortable predicting that OCR cuts will arrive sooner than the RBNZ has signaled,” said Sharon Zollner, chief New Zealand economist at ANZ Bank in Auckland.

Outlook Slashed

General merchandise retailer the Warehouse Group this week slashed its profit forecast for the year, saying retail across New Zealand is under pressure with “increasingly subdued consumer demand.”

A gauge of activity in the services sector, which makes up two thirds of the economy, has slumped to its weakest reading since the survey began in 2007 if pandemic lockdowns are excluded. The manufacturing sector has been contracting for 15 straight months.

Many insolvency lawyers and liquidators are run off their feet, said Kevin Sullivan, a barrister at Port Nicholson Chambers in Wellington.

“We’re seeing a lot more businesses in distress because of the dire state of the economy,” he said. “We’re expecting it to get worse before it gets better.”

While still relatively low at 4.3%, unemployment is rising. Job ads in May were down 31% from a year earlier. 

The government is also slashing public sector jobs to reduce spending and rein in debt. That’s hitting Wellington particularly hard because it’s home to tens of thousands of government workers. 

RBNZ Chief economist Paul Conway reiterated last week that a period of restrictive monetary policy is necessary “to give us confidence that inflation will return to target over a reasonable time-frame.” 

But he also said policymakers expect spare capacity to start emerging in the economy over 2024, and that will feed through “strongly” into lower domestically generated inflation. 

“The Kiwi economy is weak because of aggressive monetary policy,” said Jarrod Kerr, chief economist at Kiwibank in Auckland. “On the ground, ‘survive ‘til ‘25’ is the mantra we’re hearing. It’s a white-knuckle ride.”

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