The economy was weaker than expected in the March quarter, with GDP falling by 0.2%.
Economists' estimates had been a result anywhere from flat (zero growth) to positive growth of 0.8%, while the Reserve Bank had forecast 0.7% growth.
The fact the economy has shrunk in the first quarter of the year will inevitably throw a lot of attention on to the performance of the economy in the second quarter that we are now in. The 'technical' description of a recession is two consecutive quarters of negative growth - so if the economy goes backwards in the June quarter we will technically be in recession.
However, economists at this stage are expecting economic results will be better in the June quarter. The RBNZ is not forecasting the country to go into a recession and Finance Minister Grant Robertson has said he believes the country will avoid recession. The fact the economy has gone backwards in the March quarter is unlikely to deter the RBNZ from continuing to push interest rates up - as it is hell bent on curbing New Zealand's high inflation (with the annual rate of 6.9% as of March).
In response to Thursday's figures, Robertson said "the volatile global situation" had been reflected in the quarterly GDP figures, "although strong annual growth [it was 5.1%] shows New Zealand is still well positioned to deal with the challenging global environment".
National Party finance spokesperson Nicola Willis fired back with: "The economic picture was already dark with record-high inflation, rapidly rising interest rates and wages falling behind, and today’s figures prove the toll that is taking across the country."
Kiwibank's economics team of chief economist Jarrod Kerr, senior economist Jeremy Couchman and economist Mary Jo Vergara said they expected to see a bounce back in activity over the second quarter – a natural rebound following omicron.
"But it is the outlook into 2023 that has us worried. The current inflationary and rising interest rate environment is eroding firms’ profitability and straining households’ budgets. Consumer and business confidence is in the doldrums, and forward indicators of activity have fallen once again. We’re not forecasting a recession for the NZ economy over the coming year but acknowledge risks of one are rising."
ANZ senior economist Miles Workman said the GDP data "are still riddled with Covid-related noise".
"...But underneath that we think domestic economic momentum is starting to slip. Interest rates are lifting, house prices are falling, inflation is eroding household incomes, migration is negative, and consumer confidence has tanked. However, we are unlikely to see these impacts in the headline GDP data until later in the year (after the Q2 release in September). And even then, the RBNZ will need to ask if this slowdown is sufficient to take the heat out of pipeline core inflation pressures," Workman said.
ASB economist Nat Keall and senior economist Mark Smith said risks to the inflation outlook "remain tilted to the upside for now", and the RBNZ would, before pausing interest rate hikes, want to be sure that the apparent slowdown in economic activity is genuine - rather than driven by statistical noise - and that this will flow through into lower capacity pressures and inflation.
"To us the regret from not getting on top of booming inflation outweighs that from potentially driving the economy into the ground. However, the RBNZ will be closely watching activity indicators as well as those for the labour market and inflation for cues. We expect a 50bp hike in July and a 3.50% OCR peak by the end of this year, with a weak economic outlook expected to trigger OCR cuts from 2024," they said.
Capital Economics Australia & New Zealand economist Ben Udy said the probability of a technical recession in the first half of 2022 is low as the Omicron wave had largely passed by the end of the first quarter. Retail sales have already rebounded 10% from their recent trough in February, while the gradual reopening of the border should provide a shot in the arm for services exports and the tourism sector. He's pencilled in a 1.3% quarter-quarter rise in GDP in the June quarter.
"Looking further ahead, the outlook is getting bleaker. Confidence has already slumped largely due to rising inflation and interest rates. While we think inflation is around its peak, we expect the RBNZ to raise the OCR aggressively over the rest of this year. And house prices are now plummeting. REINZ estimates that the median house price fell 3.6% m/m in May alone.
"That is set to weigh on household consumption and residential investment before long. While the near term outlook will be boosted by the impact of easing restrictions, we expect the growth to be sluggish further ahead."
BNZ's head of research Stephen Toplis says "noise, noise, noise and more noise", sums up New Zealand’s GDP data.
"GDP might have contracted 0.2% in Q1 2022 but the annual average expansion is still a massive 5.1%. Is this a bust or a boom?
"We reckon it will not be until we receive the news about the September quarter, which will be released in late December, that we will get a meaningful sense of how the economy is performing at the aggregate level."
On the details of Thursday's GDP release: The 0.2% decline in GDP for the March quarter followed a 3.0% rise in the December quarter, Statistics NZ said.
Stats NZ said primary industries drove the decrease in GDP, down 1.2% in the quarter. Goods producing industries also experienced a slight decline, down 0.1%.
Key facts
In the March 2022 quarter compared with the December 2021 quarter:
- GDP was down 0.2%
- primary industries fell 1.2%
- goods producing industries fell 0.1%
- service industries remained flat
- GDP per capita fell 0.2%
- real gross national disposable income fell 0.5%
- average annual GDP to March 2022 rose 5.1%.
"We saw lower output in the food, beverage, and tobacco manufacturing sub-industry; and the agriculture, forestry, and fishing industry," Stats national accounts industry and production senior manager Ruvani Ratnayake said.
"These declines corresponded to falls in related exports categories, including dairy products; meat products; agriculture and fishing products; and other food, beverage and tobacco products."
The service industry group, which makes up approximately two thirds of the economy, remained flat. This result reflects falls in some industries being offset by rises in others.
"The services industries saw a range of results in the March 2022 quarter. Education rose as early childcare centres were able to reopen to greater capacity, while activity in retail trade and transport support services was down in what is traditionally New Zealand’s peak tourist season," Ratnayake said.
The expenditure measure of GDP was down 0.1% this quarter.
A fall in net exports, driven by falling exports of goods and services, was offset by rises in household consumption expenditure, government expenditure, and gross fixed capital formation.
The change in economic activity came in a quarter marked by the community spread of the Omicron Covid-19 variant. The March 2022 quarter included low travel due to border restrictions. However, there were fewer domestic restrictions than in previous quarters.
Stats NZ stressed that Thursday's results represent "the first official estimate of economic activity" in the March 2022 quarter.
Stats NZ continued to "review methods and data sources" used in compiling GDP, and alternative data sources are used where required.
Stats NZ said economic activity has shown a greater degree of volatility since the March 2020 quarter due to the impacts of the Covid-19 pandemic and associated response measures.
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