Here comes the rebound: NZ's post-lockdown recovery to be revealed

Tuesday, 15 December 2020

New Zealand is set to record its biggest ever increase in GDP this week, but economists say the question now is whether the recovery can be sustained.

Stats NZ will reveal on Thursday how much the economy rebounded in the third quarter of this year. Most predictions are for an increase of between 13 per cent and 14 per cent.

It will follow a 12.2 per cent fall in the second quarter, when the effects of lockdown were felt.

ASB economist Jane Turner said she expected a 13 per cent quarter-on-quarter increase in GDP.

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“That will still leave the economy about 2.2 per cent smaller than it was before the pandemic went global, but all up the New Zealand economy has proven much more resilient than most expected earlier in the year.

“Recent data has shown activity bounce back on a whole range of fronts over the course of Q3, from retail trade to construction and export activity.”

New Zealanders have been back out spending at a much greater rate than had been expected.

She said, while the economy had recovered faster than expected, the question was how much of that momentum could be sustained through 2021.

“We expect growth will be modest over 2021, given a number of headwinds, including the international border restrictions and higher unemployment.

“But there are also a number of tailwinds, including a strong goods export sector, low interest rates and strong housing demand.

“The outlook is still highly uncertain, and we will be keeping close tabs on incoming data and events. At present we believe the economy has enough going for it and sufficient policy support in place such that no further OCR cuts are needed.”

At Kiwibank, economists said they expected a 13.5 per cent increase in activity in the third quarter, compared to the second.

“The Kiwi economy …has recovered from the lockdown much faster than initially projected. And the record rise is despite the resurgence of Covid in Auckland which saw restrictions tighten in our largest city.

“The economy was far more operational than under the initial level 3 lockdown. Construction was permitted to continue, and businesses and households had adapted to the new trading environment.”

At NZIER, economists said New Zealand was on track for a V-shaped recovery.

They said they expected annual growth to drop by 4.8 per cent in the year to March 2021, which was a much smaller decline than the 7.2 per cent previously forecast.

“There remains a large degree of uncertainty over the unemployment rate over the coming years. Stronger demand in the New Zealand economy is starting to drive a recovery in hiring intentions.”

Westpac economist said, if GDP ended up about 2 per cent below where it was the same time last year, that would put the economy 4 per cent or 5 per cent below where it would have been without the pandemic.

“That’s about the size of the hole left by the loss of international travel while the country’s borders remain closed. In other words, the rest of the domestic economy is already operating at something close to full speed.

“It’s truly fantastic stuff, but unfortunately that doesn’t fully mitigate the significant challenges that lie ahead. It does, however, make the outlook for additional monetary stimulus more nuanced.

ANZ economists said there was one word that should sum up the quarter’s result: “Boing!”

“Our expectation for a 14 per cent quarter-on-quarter rebound wouldn’t take GDP back to its pre-crisis level, but it’d fall just 1.3 per cent short. That’s pretty impressive given the border remains closed, the global economy is facing significant virus-induced headwinds, and parts of the country were under either alert level 3 or alert level 2 at some point during the quarter.”

They said the economy had been supported by the “housing-induced bump to domestic demand” and the wage subsidy.

“Fiscal policy has provided tremendous support to activity through Q2 and Q3, with the Government essentially putting a decent whack of Q2’s lost production on its balance sheet for future tax-payers to deal with, preventing incomes from deteriorating anything like as much as GDP.

“And so far, it seems to have worked a treat. But now, the time has come to wean the economy off the sweet taste of sugar-hit fiscal support, and transition towards something a little more sustainable and lower GI: chiefly increased infrastructure spending… The key question is: is the private sector ready to take the reins of growth? That’ll be part of the test in 2021.”