David Hargreaves has a look at the forthcoming GDP figures - the last major economic data release for the year. As far as GDP goes - resilience is the word

It was the Reserve Bank’s mega Christmas ‘present’ to us last year.

In the November 2022 review of the Official Cash Rate, the last for the year, RBNZ Governor Adrian Orr and friends opened up a can of whoop-ass on us with a 75 basis point hike (a record for a hike) to the OCR and the ‘promise’ of a recession in 2023. Ho, ho, ho.

If that wasn’t enough (it was), the Guv’nor then told Parliament’s Finance and Expenditure select committee that the RBNZ was deliberately engineering a recession. Okay, we get it.

The context was inflation. It had broken down the door and crashed into our houses with a 32-year annual high of 7.3% in the June 2022 quarter. That was one thing, but having entered our houses in such an uncouth way, the inflation beastie was subsequently looking to take its shoes off and get comfortable. The epitome of the unwelcome guest. The September quarter 2022 annual inflation rate dropped only a little - and by much less than expected - to 7.2%.

So, the RBNZ was, by the time of that November OCR review, feeling a bit pressed; a bit behind the 8-ball. And it hit us with the ‘recession-aim’, pre-Christmas, extravaganza.

In its November 2022 Monetary Policy Statement the RBNZ forecast that GDP would keep growing in the December 2022 and March 2023 quarters, but that it would then shrink by 0.5% in the June 2023 quarter, and follow this up with declines in the next three quarters of 0.3%, 0.1% and 0.1%.

The generally accepted ‘technical’ definition of a recession is two consecutive quarters in which an economy goes backwards. The RBNZ was forecasting four consecutive quarters. And this would have kept us technically (though only just) in recession till the June 2024 quarter - and the forecast for the June ’24 quarter was not flash either, at 0.0%, followed by 0.0% in September ‘24 and, hallelujah, 0.2% in growth in December ‘24.

For just a moment in the first half of this year it looked like we had even gone off ‘early’ with this recession thing. The December 2022 quarter saw a surprise 0.6% fall (though that did follow a very surprisingly large growth of 1.7% in the September 2022 quarter). Then that December quarter drop was followed by another fall - by a whole 0.1% - in the March quarter. Bingo! Recession!

Except it wasn’t. There was a recount. When Stats NZ released the June quarter figures it revised the March quarter figure up, to 0.0%. NO recession! The economy lives. The June quarter figure itself was a relatively healthy 0.9% as we experienced something of a bounce back from the disruptions of the adverse weather events in January and February.

Our economy has refused to follow the script.

And so, to the September 2023 quarter, the results for which will be released by Stats NZ on Thursday December 14.

Ahead of these we had the RBNZ’s November 2023 OCR review. The RBNZ is now no longer forecasting recession - though it is fair to say it’s not expecting the economy to jump out of its skin in the next few quarters either.

What the RBNZ is now forecasting is the coveted ‘soft landing’. The RBNZ is indicating that it can still hit its inflation targets without the economy slowing so drastically it goes backwards. It’s the so-called ‘Goldilocks’ scenario, with the economy being neither too hot (to rile up inflation) nor too cold (to send us off the cliff).

For the record, the RBNZ thinks the GDP figures to be released in the coming week will show the economy to have grown by 0.3%, in the September 2023 quarter. The RBNZ then forecasts that GDP will register a flat 0.0% for the December quarter, 0.1% growth in the March ’24 quarter and then rather more rosy-cheeked growth of 0.5% in each of June ‘24, September ‘24 and December ‘24.

I didn’t have any economists’ forecasts in front of me at the time of writing this as there was a flurry of ‘partial’ GDP data still to be released late in the week. And economists naturally wanted to digest these before putting the finishing touches to their forecasts. But early indications from the major bank economists were of quite a range of views for the September 2023 quarter outcome of between -0.1% and 0.6%.

In terms of some of the ‘partial’ information already released...well, the September quarter retail trade figures were roughly unchanged on a seasonally-adjusted basis when compared with the June quarter - which was a positive surprise for the market.

Our goods terms of trade - the ratio of export prices to import prices - fell 0.6% in the quarter - which was also somewhat better than expectations.

However, the September quarter building work put in place figures were something of a downside surprise, with overall figures down a seasonally adjusted 2.4%, while residential was down 0.6% and non-residential down a particularly surprising 5.9%.

Some ‘overs and unders’ there then in terms of prior expectations. Probably at this point I would suspect the RBNZ’s feeling reasonably happy with its +0.3% pick. And in truth the RBNZ’s been as close as any party I’m aware of in picking the more recent major data outcomes. Arguably, of course, you would want it to be since it is the one with the hand on the interest rates lever!

Will these GDP figures ‘matter’ to the RBNZ?

Well, really only if there’s a major upside surprise. If the economy were to show a wholly unexpected growth spurt the RBNZ would see this and the heat generated by such a growth spurt as a potential risk to its inflation targeting.

In its November OCR review the RBNZ made reasonably clear it’s getting short on patience with the (slow) speed at which inflation is coming down. Remember, the headline rate, having hit that peak of 7.3% as long ago as June 2022, had only gradually made its way back down to 5.6% as of the September quarter. Inflation has now been outside of the targeted range of 1% to 3% for two-and-a-half years.

In its latest set of forecasts in the November Monetary Policy Statement, the RBNZ is still shooting to get inflation back under 3% by the September quarter 2024. It has no room for setbacks. Which means any nasty surprises with the inflation figures from here could well be met by another OCR hike.

Assuming the coming week’s GDP figures do turn out somewhat as the RBNZ expects, then it will feel a little more comfort and be able to perhaps relax a little going into the summer break.

But that relaxation won’t last for all that long as the December quarter inflation figures are set to be released on January 24, 2024. That’s huge. Less huge, but significant, are the labour market figures to be released on February 7. And then we are on to the first RBNZ OCR review of 2024 on February 28.

What the RBNZ does or does not do at that review will be very much determined by how the significant economic data turn out between now and then.

This coming week’s GDP data can therefore on one level be seen as not so much the last key data release of this year, but really the first key influence on what might happen next year. Next year is crunch time for the economy, inflation and the RBNZ.

*This article was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.