GDP drops 0.6%, economy on the skids

Thursday, 16 March 2023

Finance Minister Grant Robertson faces questions about the economy after news it shrank 0.6% in the final three months of last year. (First published 16/03/23)

The economy shrank 0.6% in the final three months of last year, Stats NZ has announced.

It also revised down its estimate of growth in the previous September quarter to 1.7%, from its original estimate of 2% growth.

The fall in GDP in the three months to the end of December was larger than any of the major banks had been forecasting.

Prior to Stats NZ’s announcement, ASB had been forecasting GDP would decline 0.5%, with the other four major banks predicting drops of either 0.2% or 0.3% after some late downward revisions.

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The GDP figures were worse than any of the banks had expected.

Finance Minister Grant Robertson said the drop for the quarter was “a little larger than what was expected”, but added that it came off the back of two very strong quarters.

“When you look at the annual numbers, we are over 2% and that’s better than most of the countries we compare ourselves to, but clearly there has been a slowing in the New Zealand economy,” he said on Thursday afternoon.

Reserve Bank deputy governor Christian Hawkesby talks about what Cyclone Gabrielle means for the economy.

The drop means the Reserve Bank may have got the recession it has been attempting to engineer about six months earlier than it had expected.

The Reserve Bank predicted at the time it released its latest monetary policy statement last month that GDP had grown 0.7% in the December quarter and would rise by a further 0.2% during the current quarter before entering a shallow nine-month recession.

If Stats NZ does confirm on June 15 that GDP also fell in the March quarter, the country is now almost six months into a recession – although one that is currently characterised by a still historically very low level of unemployment.

Infometrics principal economist Brad Olsen said the drop in economic activity was deeper than expected but he thought it was still too early to call a recession.

Economy went off the boil earlier than the Reserve Bank had expected.

That was given the potentially unpredictable impact of Cyclone Gabrielle.

“With such a big drop in the December quarter, it is harder to get a further drop after that,” he also said.

“There are parts of the economy that are slowing down a lot faster than others,” Olsen said.

A substantial drop in manufacturing and goods exports was troubling given the country was still importing a lot more from overseas, he said.

Stats NZ said nine of the 16 sectors of the economy it tracked experienced declining activity during the December quarter, with manufacturing – the hardest hit – shrinking 1.9%.

“A fall in transport equipment, machinery and equipment manufacturing corresponded to lower investment in plant, machinery and equipment while reduced output in food, beverage and tobacco manufacturing was reflected in a drop in dairy and meat exports,” national accounts manager Ruvani Ratnayake said.

Activity in the accommodation, retail and transport sectors also fell.

Ratnayake said it would typically have expected to see higher activity in those industries during what is usually the beginning of the peak tourist season, but visitor numbers were still below Covid levels.

What does it mean for interest rates?

Economists said the drop in activity was not a sign that the Reserve Bank had been too heavy-handed with its interest rate increases.

'There’s a lot of noise in the data. The goods industries fell less than expected – the services industries are just noise and pay back from what was an exceptionally strong previous quarter. The data is all over the place. There’s the lingering Covid impact, tourism recovery… we can look forward to cyclone impacts in Q1. The GDP data has been all over the place and still is,” said ANZ chief economist Sharon Zollner.

She said part of the reason some industries were not doing so well was due to capacity constraints, which could fuel inflation.

'I don’t think there’s any news for the Reserve Bank in this, in terms of where the economy is at or where it’s going.”

Infometrics chief forecaster Gareth Kiernan said the economy had still grown 2.2% over the last year and was coming off a strong base.

'So there is effectively a need for the Reserve Bank to engineer a recession and reduce the imbalance between demand and supply, and that imbalance was sizable.

'One might argue that continuing to tighten after the economy has started contracting is overdoing it, but because inflation has got so out of hand, the bank essentially needs to create spare capacity in the economy to act as a circuit-breaker to the price-setting behaviour that has become relatively embedded. There are few signs yet that inflation is starting to moderate or being brought under control, and until that is the case, it is difficult to argue the bank is going too hard.”

But ASB economist Nathaniel Keall said the bank had changed its official cash rate forecast on the back of the data.

“Inflation remains much too high, and the near-term outlook is especially worrisome. However, the weaker starting point for economic activity and increased financial markets jitters overseas suggest less urgency for Reserve Bank rate hikes.

'Uncertainty is elevated but we have shaded down our 50 basis point April OCR call to a 25 basis point hike. We also expect a follow-up 25 basis point hike in May and have maintained our 5.25% OCR peak view. We do not expect OCR cuts until mid-2024, but pronounced weakness in NZ economic activity could see these bought forward if they translate into cooling labour market pressures and sharply lower inflation.”