GDP data may show bounce before recession

Friday, 11 March 2022

Gross domestic product (GDP) data out next week could show a stronger post-lockdown bounce than expected, economists say – but that could just clear the way for a technical recession over the coming quarters.

Stats NZ will provide a GDP update on March 17, for the December quarter. GDP is the official measure of economic growth.

In the September quarter, GDP shrank 3.7 per cent due to Delta lockdowns.

Economists expect a bounce back in December, but warn that things may have already turned down again, with Omicron now circulating widely. Credit card spending dropped by $640 million in February, which Stats NZ said was probably due to people staying home to avoid the virus.

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ANZ economists said they expected a 3.5 per cent increase in GDP between September and December, more than the Reserve Bank’s forecast of 2.3 per cent.

“But let’s not get out the bubbly just yet. After all, these data are already ancient history in a rapidly changing and geopolitically tumultuous world,” they said.

We’ve been doing less shopping so far this year.

“With Omicron now rife, extreme inflation gobbling up household incomes, geopolitical tensions weighing on global sentiment, and housing having turned definitively downwards, strong growth in Q4 will only lower the hurdle for a technical recession over the first half of 2022.”

A technical recession is usually defined as two quarters of falling GDP. If March declines on December, and then June drops further from March, that would be a technical recession.

But the ANZ economists said, even with the possibility of a recession on the horizon, the Reserve Bank was likely to have to continue increasing interest rates anyway, because inflation was running so high.

“There is of course a risk that the RBNZ ends up oversteering and causing a hard landing, but taking that risk is looking like a lower-regret scenario than being behind the curve for much longer and risking compromising inflation-targeting credibility.”

Westpac acting chief economist Michael Gordon expected a 3.8 per cent increase in GDP in December.

“The Reserve Bank was expecting only a partial recovery in both actual and potential GDP – reflecting the Covid restrictions that were still in place to varying degrees over the quarter – but with activity still running above its non-inflationary potential. A stronger GDP result is more likely to indicate fewer restraints on activity than expected, rather than a greater degree of overheating.”

Infometrics chief forecaster Gareth Kiernan expected a 2.5 per cent lift in December, leaving activity 1.2 per cent below June.

There was a 60 per cent chance that it would be followed by a drop in March, he said.

“This quarter we’ve got the (relatively soft) trading restrictions across the country associated with the red traffic light setting, which are only going to have a discernible negative effect on the hospitality and events sectors. However, the spread of Omicron has definitely increased people’s hesitancy of going out.”

He said there had been big drops in spending on accommodation in February, as well as clothing and footwear, food and beverage and art and recreation. “In other words, there’s almost a de facto lockdown occurring as people stay home, either due to isolation requirements or to minimise the risk of catching the virus.”

He said spending was likely to be up in March compared to December but some of that would be due to inflation. “Particularly for something like fuel, higher spending values are likely to reflect increases in prices rather than sales volumes. More of household budgets being sucked up by soaring fuel prices and rising mortgage payments will also negatively affect spending in other areas as well.”

At BNZ, Craig Ebert was more optimistic.

He said the bank expected a 3 per cent increase in December but it could be more.

“If it got to, say, 4 per cent, it would be enough for Q4 GDP to surpass the pre-Delta high point it registered in Q2 2021, to be something like 4.6 per cent above the pre-pandemic fix, of Q4 2019. And this, despite lingering alert level restrictions through Q4 2021, particularly in Auckland. This potentially strong underlying base shouldn’t be lost sight of, as the economy enters choppy near-term waters, on account of a big wave of Covid-19 case numbers.”