This week's release of March quarter GDP figures is likely to reflect the impact of the surge of Omicron - but the immediate prospects are for a future slowdown in any case

It may be flat, but it will be noisy too. And let's not talk about Omicron. Actually, we are going to have to talk about Omicron.

The above-mentioned are all ingredients in the release on Thursday (June 16) of March quarter 2022 GDP figures. 

As ever, we are getting these figures at a time when the following quarter (IE June) has nearly finished, so, inevitably there's a bit of that rear vision mirror thing about them. 

But economists and the like will nevertheless be poring over the figures on Thursday for clues of what lies ahead. And the general consensus is that whatever the March quarter figures show, things are going to be slower this year. And the data will be 'noisy' thanks to the volatile impact particularly of Covid.

Remember for a moment that in the December 2021 quarter we got a fairly strong bounceback (+3.0%) in economic growth following the ravages of the Delta lockdown (-3.6%) in the September 2021 quarter.

This time, the March quarter, there's no lockdown - officially, but unofficially a lot of folk kept themselves to themselves due to the surge of Omicron either due to catching it or attempting to avoid it.

Perhaps unsurprisingly then there's some somewhat mixed views as to how the economy did during the three months to the end of March. The Reserve Bank forecast 0.7% growth for the quarter, but some economists, having originally pretty much concurred with that view made late changes to their forecasts as some of the 'partial indicators' of the economic data came in.

Westpac acting chief economist Michael Gordon, for example is now estimating that GDP was "flat" in the March quarter.

"This is a downgrade from our earlier forecast of a 0.6% rise, due to some softness in the final batch of sectoral data releases.

"Covid continues to act as a handbrake on the economy. While the December quarter was marked by ongoing Government-mandated restrictions, the March quarter included the peak of the Omicron wave, with worker absenteeism being a substantial issue. We expect a stronger pickup in the June quarter, and our forecast for growth in 2022 overall remains broadly unchanged."

Gordon said as a bellwether for the economy, retail spending (excluding hospitality) was about flat for the quarter. The monthly card spending figures showed that this included a pullback in spending in February and March, during the Omicron peak, which has now been mostly reversed in the April and May figures.

"So we expect to see a reasonable pickup in June quarter GDP, aided by the border reopening and the start of the gradual return of international tourism.

"Notwithstanding this short-term outlook, we expect GDP growth for 2022 as a whole to be substantially softer than the 5.6% rise over 2021. As the year progresses, we expect that falling house prices and higher interest rates will see consumer spending flatten out. This is a necessary part of the process of bringing inflation pressures to heel, by bringing domestic demand back in line with the economy’s capacity to meet it."

ANZ senior economist Miles Workman is also now picking a flat quarter (0% q/q) for economic activity as of March.

"That’s a decent downgrade from our previously published forecast of 0.6% and much weaker than the RBNZ’s May MPS forecast of 0.7% q/q.

"But there’s probably too much COVID noise lingering in these data to comfortably diagnose the trend. Downside Omicron risks in Q1 imply equivalent upside bounce risk in Q2, meaning the RBNZ may well look through a forecast miss to some extent."

He says for the RBNZ, a miss on their forecast may not carry much in the way of implications for their view of appropriate monetary policy settings – particularly if they tee this up to stronger-than-expected capacity pressures.

"But more than that, the GDP data are simply too noisy right now, and with inflation and the labour market where they are, it’s still very much a “keep calm and carry on” (with front-loaded OCR hikes) situation out there. To the extent that Omicron disruption weighs on Q1, then we (and possibly the RBNZ) may look to factor in some rebound in Q2 as these impacts dissipate. In other words, weaker Q1 activity may not necessarily mean weaker H1 activity."

Having said that, Workman says that the markets, "will do what markets do". A stronger than expected GDP figure would likely reaffirm interest rate pricing along the lines of the RBNZ’s May forecast, which was for a peak Offiical Cash Rate of almost 4%, with at least two more 50-point rises (we've just had two already, taking the OCR to 2.0% at the moment).

"However, a weaker read will likely see markets carry a little more sympathy for our view that the OCR will peak at 3.5% and that there’s only one more 50-pointer to come (July) before the timely data deteriorate sufficiently to suggest that 25bp hikes better reflect the balance of risks.

"Indeed, if the RBNZ focus solely on core inflation and labour market indicators (both of which tend to be slow moving and lag the broader economic cycle), then they are almost guaranteed to oversteer and induce a harder landing than intended or quite possibly necessary. But at the same time, the GDP data are still very noisy. So what’s the Bank to do?"

Workman says Covid has proven itself to be both a source of significant volatility in the GDP data and a shock to economic supply (eg labour mobility and productivity).

"That means economic activity relative to “trend” is difficult to diagnose right now, making it a relatively poor barometer for underlying inflation pressure. Chances are we see some soft signals in the Q1 GDP release, only to see some reversal of that in Q2."

In terms of the details in the March GDP figures, Workman says the 'partial' Q1 GDP indicators have been mixed. Retail spending fell 0.5% q/q, building work put in place lifted 3.2%, manufacturing volumes fell 3.5% q/q, wholesale trade (adjusted for price changes) was relatively flat, and hours worked across services industries lifted just 0.1% q/q.

"Overall, our expectation for no growth in Q1 is driven by a 0.8% contraction across goods-producing industries and a 0.2% contraction across primary industries, largely offset by a 0.3% q/q lift across services industries (which account for around two thirds of GDP)."

ASB economist Nat Keall is picking the NZ economy to have lifted 0.6% over the three months to March, despite the Omicron outbreak.

"The future is more important than the past and, on that front, growth is set to slow over 2022 and 2023. Like Murder on the Orient Express, a plethora of headwinds are ready to stick the knife in, with higher interest rates, ongoing cost pressures, slowing construction, softer agriculture production and more cautious households in the frame."

Keall said if the ASB economists are right about their pick of +0.6% for the March quarter, following the post-Delta bounce back of circa 3% in Q4, this leaves the economy still a little bit smaller than it was before the country went back into lockdown last August.

"That’s not a bad performance considering the Omicron wave hit over the course of the quarter, hitting a chunk of the labour force and crimping some retail spending.

"The future is ultimately what matters, so while NZ’s economic resilience thus far has been impressive, we need to be mindful growth is still set to slow this year. A fair chunk of the lift this past quarter was probably the continued bounce back from last year’s lockdown. For example, there was still a chunk of construction activity in the pipeline to work through, and probably a bit of pent-up demand from households as well. We don’t expect that momentum to be sustained, given the mounting headwinds on the way."

Keall says none of the challenges New Zealand faces are unique. The circumstances faced by the global economy are challenging and there aren’t any quick fixes.

"And its not to say the economy doesn’t have real strengths too – we are optimistic NZ exports will hold up well thanks to high prices and resilient global demand. But growth will be slower over 2022 and 2023 than it was in 2021 – closer to 2.0-2.5% and 1.0-1.5%, respectively, than the 5.6% lift last year."

Keall says Interest rates are set to keep going up this year even as growth slows.

"While the economy may be losing momentum, the starting position for the labour market is extremely tight with unemployment low and wage pressures set to tick up. The upshot is that getting inflation under control is still the priority for the RBNZ for now, and we still see the OCR hitting 3.50% and mortgage rates moving a bit higher over the remainder of the year. 2023 is when the calculus will start to get a bit tougher, particularly if the housing market slowdown deepens more than we expect."