If there's an upside to grim GDP data, it might be that we'll get through this sooner. Photo / 123rf

Prime Minister Christopher Luxon was right. He has inherited a recession.

Technically, economists require two consecutive quarters of data before calling a recession, but in the real world all the evidence suggests we arealready there.

Across the whole year, gross domestic product (GDP) fell 0.6 per cent. In a year when New Zealand had record levels of net migration, that paints a grim picture.

Per capita, GDP was down 0.9 per cent.

GDP fell 0.3 per cent in the September quarter. The consensus of economic forecasts was for tepid growth of around 0.2 per cent.

Economists weren’t wrong about the trend - they all see the economy slowing as monetary policy works its inflation-busting magic.

Higher interest rates are still to take their full toll on the economy as more people roll off fixed mortgages. There is no reason to assume things won’t slow further.

The issue with the forecasting was more likely one of timing. The Reserve Bank and most market economists have long expected the last quarter of this year and the first quarter of next to be the toughest in the economic cycle. Unfortunately, that may still be the case.

So here we are. In the thick of it all right before Christmas.

Prime Minister Christopher Luxon has inherited a recession. Photo / Mark Mitchell

For countless small firms, retailers and hospitality businesses none of this will be a surprise. At the "coal face" a slowdown, whatever you want to call it, has been evident for months.

If there is any good news here it is that monetary policy is working as we might have hoped. It looks like the band-aid is being ripped off faster after all.

In other words, if we are slowing down faster than expected, that might mean inflation easing faster and rates coming off sooner.

Economists like Stephen Toplis at BNZ and Jarrod Kerr have leaned into this view in recent months, making them look dovish on the inflation front and optimistic in their interest rate outlooks. But only because they have been more negative in their outlooks for economic growth.

This is the increasingly acute trade-off the Reserve Bank (RBNZ) faces in the year ahead.

How far can it push the economy before the cost - in business failures and unemployment - is too great?

Still, today’s data suggest RBNZ policy is already working and faster than many thought.

While most economists will be cautious of reading too much into today’s data (given the inevitable revisions to come) and won’t rush to shift their interest rate calls, today’s data makes it increasingly hard to believe that the RBNZ will need to hike again - or that it will be able to stick to its current forecast, which suggests no rate cuts until the end of 2025.

For mortgage holders, it might almost be cause for cheer - if it wasn’t for the spectre of redundancies rising as more companies turn their focus to costs.

Unemployment is expected to rise to 5 or 5.5 per cent in the next year - still technically low by historical standards.

But historical standards don’t count for much if it’s your job on the line. At the margins, the job market has already turned and tightened significantly.

For the new Government, inheriting a recession effectively delivers a clean slate. The job now for Luxon and Finance Minister Nicola Willis is to maintain consumer and business confidence.

They need to look forward and lay out a clear pathway through this cycle.

It won’t be easy. For many New Zealanders, the next six months will involve a trifecta of tough economic conditions - high interest rates, lingering high inflation and the job and business insecurity of a recession.