GDP result this week: The leap before the fall

Monday, 13 September 2021

More businesses are operating in level 4 this year, Sharon Zollner says.

Gross domestic product (GDP) data due out this week will show a historic increase from last year – but there’s a warning that the current lockdown will take a bite out of the next quarter’s growth.

Data will be released on Thursday for the June quarter.

Economists are predicting a quarter-on-quarter increase of between 1.1 per cent (at Kiwibank) through to 1.5 per cent (at ASB).

That would mean a roughly 16 per cent year-on-year lift in GDP.

“That’s probably the highest number we’ll ever see but it’s because 12 months ago in Q2 we were in lockdown,” said ANZ chief economist Sharon Zollner.

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Level 2 rules are still taking a bite out of hospitality profitability.

Zollner said while the June result would be overtaken by the events of this quarter, it was still useful to gauge the starting point for the economy.

“For what it’s worth, we see pretty broad-based growth outside the sectors being directly impacted by the closed border.”

She said the current lockdown would take about 6 per cent off the result next quarter.

But data showed more economic activity happening in level 4 this time than in 2020, she said.

“Of course, 60 per cent of the country is now in level 2, although it’s not what level 2 used to be. We were all much better prepared for it this time. I’d say there’s probably been a fair number of people surprised at what’s turned up at their door that they thought wasn’t going to be delivered until after lockdown.

“On the other hand, the supply chain challenges through the rest of the country while Auckland remains at level 4 are pretty significant.”

She said what would matter for the economy was how businesses changed their investment plans, employment plans and any increase in insolvencies. That would be more important than a fall in production GDP, she said.

At Infometrics, Gareth Kiernan expected lockdown to knock about 7 per cent off GDP quarter-on-quarter. “But getting a sense of how strongly the economy is going is useful.”

ASB chief economist Nick Tuffley said retail spending, accommodation, manufacturing, logistics and various services had helped support momentum in the first half of the year.

But the longer strict lockdown conditions remained in Auckland, the greater the prospect of scarring to the economy, he said.

ASB expects a 6.5 per cent fall in Q3 and a 7.8 per cent rebound in Q4.

“We’re still expecting by the end of 2021 we will be 0.8 per cent ahead of where we were at the mid-point of the year.”

There would be significant activity that would recover much of the lost activity, he said, but some would not be able to be recouped.

“If you’re missing a month of takeaway coffee, you’re not going to spend the next month having two every morning to make up for what you went without.”

The new rules for hospitality in level 2 made it harder for some of those businesses to break even, he said.

Kiwibank economists said they expected a 7 per cent plunge in GDP because of lockdown, followed by an 8.5 rebound at the end of the year.

“[We are] picking that the hit to the economy in the September quarter is in the order of a 7 per cent decline. That's a large drop, but not as severe as last year's 11 per cent fall. Businesses have adapted as best as possible to being locked down, and outside of Auckland restrictions have been eased faster than last year.

“The economy's solid momentum heading into lockdown should help as we come out the other side. Also, recent experience tells us that activity rebounds rapidly when lockdowns are lifted. Pent-up demand is unleashed as freedom returns. We are picking a rapid 8.5 per cent quarterly rebound in Q4 – a forecast dependent on restrictions being wound back further in the coming weeks. Locking down an economy is not costless. As we have seen from last year's disruption, closing borders and locking down a country causes economic scarring. The economy's output would likely have been over 1 per cent higher had we not had Covid.”