Here comes New Zealand's biggest quarterly GDP drop ever

Monday, 14 September 2020

Data to be released on Thursday will show New Zealand’s economy has experienced its sharpest, deepest contraction on record.

Gross domestic product data for the June 2020 quarter will be released on Thursday, showing the impact of the March and April lockdown.

New Zealand is one of the last countries in the OECD to report its second quarter GDP data. The UK has already posted a year-on-year drop of 21.7 per cent, France almost 14 per cent, Italy just over 12 per cent and Canada 12 per cent. The US dropped 9.5 per cent.

ASB chief economist Nick Tuffley said the data could only serve as a rough approximation of the impact because it was hard to accurately measure the extent of the fall in activity.

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Lockdowns earlier this year took a chunk out of virtually all sectors.

“Particularly under the difficult conditions Stats NZ and many businesses are operating in.”

He said ASB expected to see a drop of 11 per cent for the quarter. That’s revised from the 17 per cent drop ASB expected when the lockdown first took effect. Tuffley said, with Government support continuing and some sectors not being as badly hit as was expected, the impact was less.

“Some activity has rebounded to pre-lockdown level quickly. Retail has been a bit like a cork pushed under water.”

Still, he said it would be the biggest quarterly drop on record and one of the worst annual results since the great depression.

Christina Leung, at NZIER, said she expected a drop in activity of 10.5 per cent in the quarter.

“Given all the measurement issues, which Stats NZ have tried their best to work their way around given the difficult circumstances, this GDP release will be more an estimation than actual record of activity over the quarter really.”

Infometrics expects a 13.5 per cent drop year-on-year and a 12.8 per cent drop in the quarter.

Kiwibank economists said they expected a 12.5 per cent fall for the quarter and annual growth to be down by about 13 per cent.

“Our forecast is less severe than the 18 per cent contraction we had previously pencilled in. The nationwide lockdown at the start of the quarter put the brakes on the economy as we hunkered down to fight Covid-19.

“The economy came out of lockdown sooner and with more sustained vigour than was expected. The unprecedented nature of the fall in Q2 GDP means there is a significant margin of error around any forecast. And there is likely to be large revisions made to the numbers in the quarters ahead.”

They said the data would show no industry had been left untouched by the lockdown.

“Industries reliant on foreign visitors such as tourism and education will be the hardest hit. Arts and recreation activity may fall by almost a third and retail trade is expected to make the largest contribution to the fall in GDP.

“Manufacturing is also likely to be a major contributor to the fall, as non-essential production was halted in level 4. Primary production is expected to post a moderate fall, with forestry bearing the brunt of the global Covid disruption.”

But while the data will probably show the bottom of the economy’s Covid-19 hit, the data was already a bit historical, Tuffley said. GDP will be “much, much higher” in the September quarter.

But he said it would still yield useful information about how the economy could be expected to perform in cases of future lockdown.

“What lies ahead is of much more importance than what happened last quarter. We are almost at the end of the third quarter. A decent rebound in activity is expected in Q3 and we are picking a 10 per cent quarter-on-quarter jump. Despite Auckland's level 3 lockdown the economy continues to recover,” Kiwibank’s economists said.

“Spending did exhibit a small dip from the Auckland lockdown but has since rebounded strongly. Our longer-term forecasts of GDP are picking a return to pre-Covid levels of GDP by early 2022.”

The Reserve Bank expects a 14.2 per cent drop in the quarter but BNZ’s economists said a surprise over or under that would not change its policy direction significantly. They expect a dip of 13 per cent.

“It too is more worried about the future than the past. In terms of that future, so much will depend on the number and extent of future restrictions. The fact that New Zealand had a bigger initial slump than most will pale into insignificance if our return to ‘normality’ is faster. But if we have a series of major lockdowns that keep us closer to our June quarter base then the environment could get very nasty.

“In a levels sense, we currently forecast economic activity will return to where it was pre-Covid in the third quarter of 2022. Recent relative strength in economic momentum has seen us bring this forward from 2023. We doubt that there will be much in Thursday’s GDP data to change this view.”