Covid-19 took 1.6 per cent chunk out of GDP by end of March

Thursday, 18 June 2020

Economic activity stalled in the first quarter, data shows.

New Zealand's gross domestic product fell 1.6 per cent in the March 2020 quarter, which was a bigger drop than the 1 per cent decline that analysts had on average forecast.

The decline was the biggest quarterly drop in 29 years but will pale into insignificance compared with the double-digit drop in GDP being forecast for the June quarter when the coronavirus lockdowns were in full swing.

Economist Infometrics forecasts that next quarterly drop will be 16 per cent.

Confirmation from Statistics NZ that the economy shrank in the first quarter means a technical recession will be confirmed when the June figures are reported, as a recession is generally defined as two consecutive quarters of GDP decline.

ASB said the fall was 'larger than ourselves and the market expected', but noted it was less severe than the 2.4 per cent decline forecast by the Reserve Bank in its May monetary policy statement.

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Westpac senior economist Michael Gordon said the decline 'was well within the range of possibilities given that there were big unknowns about how the impact of the lockdown would be captured'.

National Party leader Todd Muller said the data 'confirmed National’s worst fears about the looming economic and jobs crisis'.

'Even though this data today covers just one week of lockdown, it is the worst result in 30 years, despite the wage subsidy scheme and massive fiscal stimulus,' he said.

“On a per capita basis, the news is even worse – with the income of the average Kiwi down 2.2 per cent in the March quarter.'

Westpac chief economist Dominick Stephens said on Monday that other, more recent signs pointed to the economic fallout of the coronavirus not being as bad as first feared.

Bank card spending data released by Statistics NZ last week showed a stronger-than-expected post-lockdown 'bounce'.

A Westpac consumer confidence survey showed confidence among consumers about the year ahead – while weak – had not fallen below levels seen in 2009 during the global financial crisis.

ANZ economist Liz Kendall said the country was currently seeing a post-lockdown bounce in activity.

'But the longer-lasting recessionary effects of this crisis will be determined by where the trend settles after that', she said.

'For now, there is a lot of 'noise' to wade through.'

Treasury secretary Caralee McLiesh told Parliament's Finance and Expenditure select committee on Wednesday that 'on balance' it saw some near-term improvements to its forecasts that were released with the May Budget 'but also a slower recovery'.

While Treasury still expected New Zealand to face the sharpest contraction on record in the June 2020 quarter, there were some initial indications the June quarter activity had held up better than expected, she said.

Treasury secretary Caralee McLiesh says post-Budget data points to some near-term improvements to its Budget forecasts, but also a slower recovery.

Some measures of retail spending such as electronic card spending had now returned to pre-Covid levels, heavy traffic volumes returned to 95 per cent of pre-Covid levels by the end of last week and 'while JobSeeker numbers have increased significantly they do remain somewhat less than forecast', she said.

Against that, a weaker world outlook would weigh on growth prospects in New Zealand, she said.

Thursday's GDP data showed a widespread drop in activity as travel restrictions took hold and the country moved towards lockdown.

“The 1.6 per cent fall surpassed quarterly falls during the global financial crisis in the late 2000s,” Statistics' national accounts senior manager Paul Pascoe said.

“It is the largest quarterly fall since the 2.4 per cent decline in the March 1991 quarter.”

Lockdown took effect on March 25, forcing non-essential businesses to close. That affected about 7 per cent of this result.

“Industries related to international travel, such as accommodation and transport, began to feel the effects of Covid-19 earlier in the quarter, with activity dropping significantly once the borders closed on March 19,” Pascoe said.

Service industries contributed the most to the drop in activity, making up almost half of the overall fall in GDP.

The hospitality industry (accommodation, restaurants, and bars) was among the most affected industries, falling 7.8 per cent, as tourism fell after the border was closed to slow the spread of Covid-19.

Activity in the construction industry fell 4.1 per cent and the transport, postal, and warehousing industry fell 5.2 per cent. These falls reflected the impact of lockdown measures as building sites shut down and non-essential workers were told to stay home.

Parts of the transport industry, such as air transport, were also affected by the restrictions on travel.

Household consumption expenditure fell 0.3 per cent. Spending fell on long-lasting products (durables) such as motor vehicles.

A fall in services, driven by accommodation, international and domestic air passenger services, and recreational services, reflected the drop-off in travel as the pandemic spread. Households were not able to buy non-essential goods and services as such businesses shut down.

A strong increase in spending on short life-cycle goods offset these falls, as households prepared for the lockdown by buying supplies, from flour to toilet paper. The different results for consumption of durable and non-durable items showed the changing behaviour of consumers in response to Covid-19.

New Zealand’s 1.6 per cent decline in economic activity in the March 2020 quarter compares to a 0.3 per cent fall in Australia. In the same period, there was a 2.1 per cent decline in Canada, a 0.6 per cent decline in Japan, a 2.0 per cent decline in the United Kingdom, and a 1.3 per cent decline in the United States.

Annual GDP growth for the year ended March 2020 dropped to 1.5 per cent, compared with a 3.1 per cent growth in the year ended March 2019. Annual growth in GDP has been generally slowing since December 2016 when it was 3.9 per cent.