Figures to be released in the coming week may or may not show the country entering a 'technical recession' - but either way, the Reserve Bank will be content enough if the data shows heat coming out of the economy

Thanks to surprisingly weak December quarter Gross Domestic Product (GDP) figures, only one question will be being asked before release of March quarter GDP data in the coming week.

Yes, it will be the inevitable 'are we there yet?' - with the 'there' referring to the possibility of New Zealand being in recession.

Remember, the December quarter figures, released in March, showed that the NZ economy had shrunk by 0.6%, which was quite a surprise. The Reserve Bank (RBNZ) had forecast positive growth of 0.7%.

A 'technical recession' is two consecutive quarters of a shrinking economy. So, it follows that if our economy has gone backwards again in the March quarter, then there's your recession.

Well, we'll find out on Thursday, June 15 when Statistics NZ releases the March quarter figures. If NZ does indeed find itself in something beginning with 'R' then expect to hear quite a lot about it. The mainstream media will shout about it. There's great shock value in that word.

But really, even if we do prove to currently be in recession, we shouldn't get hung up on the 'R' word - because in itself it's fairly meaningless. The economy doesn't shrivel up and die because it's got 'R' disease. It means the economy has shrunk, possibly not by very much. That's all. Not the end of the world.  

It's a matter of degrees. There's recessions and recessions.

I'm not sure how well people remember even though it wasn't long ago, but the last time we technically entered recession was as recently as June 2020. In fact the June quarter of that year saw our GDP contract by an eye-watering 10.3%. Yikes. However, we did that to ourselves. It was the original Covid lockdown of course - and we blasted straight back with 13.9% growth in the September quarter of that year. Recession? What recession?

Prior to that last technical recession in 2020 the most recent one we had was one I would bargain that most people missed. It was the third and fourth quarters of 2010 and the economy shrank by 0.2% and 0.5% respectively. Blink and you miss it.

Now that was what I called 'a recession'

However, you couldn't blink and miss the five quarters of negative growth that we saw in 2008-09 in the aftermath of the Global Financial Crisis. And those of us with rather longer memories struggle to forget the very-grim-indeed period from the late 1980s through the early 1990s in which the lowlight was a 2.4% fall in GDP in just the first quarter of 1991. By later that year unemployment was nearly 11%.

And it is the last sentence above that is the key. At the moment unemployment is just 3.4% making this economic slowdown we are now entering into very different to previous such periods.

Yes, unemployment is expected to rise, with the RBNZ expecting it to hit 5.4% by the end of next year. But the very low starting point to unemployment is what's underpinning thoughts that any recession may prove to be a shallow one - and indeed that we might even be able to avoid one. If people still have jobs, obviously they can battle through tougher times and keep paying the mortgage etc. On the contrary, large numbers of unemployed people lead to spending grinding to a halt, which slows the economy even further.

The RBNZ, which surprised people more than a little by conceding late last year that it was attempting to engineer a recession through its interest rate hikes,  now expects just the mildest of mild recessions. And not yet. Later.

It is forecasting positive GDP growth of 0.3% for the March quarter. So, if it's right we are not currently in recession. However, hold your horses - the RBNZ's forecast in the May Monetary Policy Statement is for the economy to contract by 0.2% in the June quarter and by 0.1% in the September quarter (recession time!), before we get a stagnant 0.0% reading in December. So, the mildest of recessions - the central bank thinks. But the central bank also thinks the best we will do in any quarter during 2024 is 0.4% growth, which is not exactly shooting the lights out in terms of growth.

Therefore, it may be that we have an ongoing discussion about whether there will be a recession or not - but the economic environment is not going to be great whatever the outcome.

But all that is for the future.

In terms of how we did in the March 2023 quarter, its fair to say the signals ahead of the GDP figures being released have been pretty mixed and this could go either way. We may have snuck in with a teeny tiny bit of growth, or we may have gone backwards by an equally teeny tiny amount. I'm not feeling bold enough to call it either way. At time of writing I had seen just two of the big bank economists' forecasts for the GDP figures and they were both tipping positive figures - just.

Looking for clues

Looking at the economic 'partial indicators' that have been released ahead of the GDP, one notable was that retail sales went backwards for the second successive quarter. Sales by volume dropped 1.4% on a seasonally-adjusted basis in the March quarter, following a 1.0% drop in the December quarter.

Against that though, building activity possibly fared better than expected, with building work put in place up a seasonally-adjusted 0.6% in the March quarter. Clearly though, looking ahead, all the signals are that the building sector is looking at a substantial downturn in activity in coming months.

Business data also painted a mixed picture. Just six of the 14 industry categories Stats NZ covers saw seasonally-adjusted sales growth in the March quarter. The manufacturing sector saw a 2.8% drop in sales, seasonally adjusted, while wholesale trade sales slipped 0.3% in the quarter, again seasonally-adjusted.

But the labour market is still looking hot, with filled jobs rising 1.1%, seasonally-adjusted, in the quarter. Such a performance at a time when the economy is definitely slowing would again suggest the impact of the surge in migration, with the inbound people filling vacancies that simply couldn't previously be filled when the border was closed. It is the satisfying of pent up demand. 

So, that's the background and the very mixed picture we see. What are the economists saying then?

Source: 123rf.com. Copyright: troyzen

ASB economist Nat Keall notes that GDP data are "backward looking and prone to revisions" at the best of times, "but it’s likely to be an especially lumpy quarter with Cyclone Gabrielle’s impact crimping activity in some sectors of the economy and boosting it in others".

The ASB economists are picking the economy lifted by 0.1% for the March quarter. They earlier expected a potentially protracted recession starting in 2023 and heading into 2024, but now no longer expect one at all "though we are far from confident in that view".

"We’re not unique in that analysis, with both the Treasury and the RBNZ revising their own growth forecasts higher. The economy still faces a myriad of headwinds that will weigh on output – namely slowing global growth, soggy household balance sheets, and restrictive monetary settings – such that we still expect growth to slow over 2023 relative to 2022. We’re expecting growth to be pretty meagre, and it wouldn’t take much to tip things into recessionary territory.

"...Still, it will feel like a recession for many. Growth is set to be uneven over the coming year, with stronger population growth and more fiscal stimulus set to have a marked impact on some sectors, and a less meaningful influence on others. Construction, retail, transport, real estate, health care and recreation are the most obvious beneficiaries. Sectors like manufacturing and agriculture – which have already suffered several contractionary quarters – face less upside. How the next twelve months ‘feel’ will depend a lot on which sectors your business, employer and household are most exposed to.

"What’s more, we still expect a ‘per-capita’ recession. Strong net migration is set to prop up output in an aggregate sense, but GDP growth per person looks more likely to go backwards given the broader economic headwinds facing individuals, households and businesses. Our current outlook sees real GDP decline on a per capita basis not only this quarter, but also Q2 and Q3 2023 as well," Keall says.

ANZ economists are picking that the economy grew 0.2% in the March quarter.

"Economic momentum has clearly slowed, but the Q1 data will have its fair share of noise, complicating the diagnosis," ANZ senior economist Miles Workman says.

"Some of the partial GDP indicators suggest cyclone Gabrielle impacts could be a little more significant (and negative) than our assumption, but very strong population growth (on the back on net migration) and less seasonal pressure on economic resource in Q1 could more than offset that.

"Putting it all together, there’s a lot to get your head around in the Q1 GDP figures. A weak read could be a signal that Q2 growth will bring a solid rebound (cyclone impacts), while a strong read could reflect more bounce from Q4’s weakness than expected (a noise/easing capacity story). Or perhaps both these scenarios will play out and offset. Either way, we do expect to see evidence that underlying momentum is subpar, particularly in per-capita terms.

"While our forecast is for the economy to avoid picking up a technical recession handle in Q1 (ie two consecutive quarters of negative growth), this is certainly within the realm of plausible outcomes. Should that occur, it’s important to note that a lack of economic resource (particularly labour) is at least partly to blame for current growth headwinds. The sniff test for a genuine economic downturn is an elevated unemployment rate. That may yet happen, but unemployment in Q1 was near a record low," Workman says.

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