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The country is set to see its largest ever contraction in the economy reported this week - but the final figure's actually expected to be much smaller than first feared and the focus is already on how much the economy will grow by in the September quarter

The country is set to see its largest ever contraction in the economy reported this week - but the final figure's actually expected to be much smaller than first feared and the focus is already on how much the economy will grow by in the September quarter

Look out! It will be big and it will be ugly.

June quarter GDP figures to be released on Thursday (17th) this week will show a record quarterly drop in economic activity.

But if you want to take a glass half full look at things, the GDP figure that's set to be recorded later this week is actually not going to be anything like as bad as first feared (with a fall in excess of 20% suggested). 

And the fall, for the June quarter, is already largely historic - to the point where much of the attention already is in how big the recovery already under way in the September quarter will be.

The June quarter drop will confirm the country as being in recession, if such confirmation was really needed, as the 'technical' description of recession is two consecutive quarters of negative GDP growth. Remember that the March quarter saw a 1.6% drop.

Most economists are picking somewhere in the region of a 10% to 13% fall in GDP for the June quarter, although the Reserve Bank's been a bit gloomier than that with a -14.3% pick. It should be pointed out though that the RBNZ pick came out on August 12. So, more than a month ago. And a month has been a very long time in terms of picking where the economy's heading this year.

September bounce-back

The September bounce-back in the economy is expected to be similarly vigorous, also of double digit size. The RBNZ's picking +12.2%, although for the whole of 2020 its pick is that the economy will shrink by 5.8%. 

BNZ economists are picking a -13% figure for the June quarter, taking activity levels to 13.3% below where they stood in June 2019, BNZ head of research Stephen Toplis said.

"If we are right then the data will confirm that the hit New Zealand took from its lockdown was one of the worst in the developed world."

Toplis said the biggest sectoral declines will have occurred in tourism, hospitality, arts and recreation, rental hiring and real estate services. Few sectors will have escaped scot free though there is a chance that agriculture, telecommunications, and government will reveal modest growth.

"The importance of the GDP data is in establishing the base from which the economy is now accelerating. But, frankly, we are much more interested in how fast the economy can recover to its pre-covid levels than we are in the extent of the initial gap."

The economics folk at Kiwibank have, as usual, come up with a lively description for what's to be released on Thursday (17th) with "Gross Domestic Plummet". 

They are picking a 12.5% drop, with a 10% rise to come for the September quarter.

"It's important to note that the second quarter decline will (likely) be shallower than we (all economists) had initially expected," the Kiwibank economists say. (For the record, they had originally forecast an 18% drop).

"And the bounce back into the current third quarter will be vigorous..."

'Strong activity out of lockdown'

They point out that the the large declines in the initial nationwide lockdown, "were followed by surprisingly strong activity out of lockdown", while Auckland's subsequent lockdown "was less severe".

'What lies ahead is of much more importance than what happened last quarter," they say.

"We are almost at the end of the third quarter. A decent rebound in activity is expected in Q3 and we are picking a 10% [quarter-on-quarter] jump. Despite Auckland's level three lockdown the economy continues to recover. Spending did exhibit a small dip from the Auckland lockdown but has since rebounded strongly. Our longer-term forecasts of GDP are picking a return to pre-covid levels of GDP by early 2022."

One of the key things to look out for in future months and indeed possibly further ahead than that will be for revisions to the GDP figures. Nobody expects that the release on the June quarter this week will be the end of the story - simply because of the difficulty Statistics New Zealand had pulling all the information together during the lockdown.

Significant revisions ahead

ANZ senior economist Miles Workman says revisions to the data over the next year or so could end up being just as significant as any forecast “miss”.

"Stats NZ’s sources and methods were not developed with lockdown in mind, " he says.

Workman says the 12% pick for contraction ANZ economists have pencilled in for second quarter GDP will see the economy back at levels last seen in 2015. Per capita GDP will be cast back even further – to levels that prevailed in 2005.

"However, given how rapidly this crisis has evolved, Q2 is already beginning to feel like ancient history. We’re now in the final month of Q3, a quarter that’s likely to bring the sharpest quarterly economic expansion we’ll ever see. That’s despite being hindered by renewed lockdown measures, which will leave the level of GDP lower than otherwise and keep the data noisy for the rest of 2020."  

The rebound is crucial

Westpac economists are picking an 11.5% fall in June quarter GDP, Westpac senior economist Michael Gordon said.

"While the depth of the Q2 hit to the economy is of interest, what’s more crucial is how far the rebound extends," he said.

"Assuming no new Level 4 lockdown, we’re forecasting GDP to jump by around 8% in the September quarter and almost 4% in the December quarter. That would bring GDP to around 5% below its pre-Covid trend by the end of the year. However, that gap represents the loss of international travel and tourism due to border closures, so is likely to persist for some time."

In terms of the June quarter, Gordon said those sectors of the economy that fared best would have been those that were most able to operate under level 4, either due to being deemed ‘essential’ or being able to continue working from home. That includes agriculture, food manufacturing, finance, some professional services, and government.

"That said, some of them will still have taken a sizeable hit from the drop in domestic demand during the lockdown."

Government spending to contribute

Gordon said he expected a positive contribution to the outcome from government spending, "though this is highly uncertain".

"Bear in mind that this component only captures final demand from government – services such as education, health and law and order. Most of the Government support provided during the lockdown was in the form of transfers to households and businesses, the largest of which was the wage subsidy scheme. Consequently, the main impact on GDP was probably in the form of preventing an even bigger drop in consumer spending."

ASB economists are picking an 11% June quarter GDP fall, ASB senior economist Jane Turner said.

"There are limited policy implications from the Q2 GDP release, as the RBNZ and fiscal policy have already responded to the lockdown with a range of measures," she said.

"Going forward, further policy moves will be dictated by developments over the rest of the year and 2021.

"Like many others, we expect growth to rebound strongly, particularly over Q3. By Q4, we expect annual GDP growth to be down only 5% – although we see the risks now skewed to an even stronger H2 2020 recovery. Nonetheless, with unemployment rising and the borders to remain closed, we continue to believe the RBNZ’s 2021 GDP growth forecasts are on the optimistic side and expect the OCR to be cut to negative territory in April next year."

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29 Comments

Never fear, it will be propped up by housing wealth according to Westpac!

The ol' wealth effect kicking in Moa? I think the RBNZ has doubled down on that outcome. Getaway weekends to QT; frequent Sunday visits to the trendy cafe for family brunch; and the installation of a new spa pool. Adrian 'King Herod' Orr would be delighted to see this.

Exactly. ALSO good news for landlords, they will remain unaffected.

Obviously some renters will lose their jobs, BUT the government will continue to ensure the Ministry of Social Development cover's rent arrears. This is probably an inconvenient for landlords (filling out forms with their tenants, processing times, etc) ..

I'm sure MANY/MOST/ALL newly unemployed renters can negotiate with WINZ to automatically pay their landlords. Also landlords (with a mortgage) are enjoying historically low interest rates, which off-sets the inconvenience.

If all else fails, there is a shortage of rentals [forgetting about unoccupied properties], so finding a new tenant shouldn't be a problem.

Exactly. ALSO good news for landlords, they will remain unaffected.

Property services is one of the most important components of NZ's GDP.

https://www.stats.govt.nz/experimental/which-industries-contributed-to-n...

Don't forget the stock market. In this economy Bear is Bull, Bull is Bull, and anything can be fixed with a bit of RBNZ pixie dust.

Absolutely, the likes of Sharesies have been a boon for the NZX and let's be real .. the billions Orr has injected finds its way into stocks directly or indirectly via balance sheets.

Another YouTuber with doom forecast -

https://youtu.be/2rXAUAOjcLA

He could be right, but only because America has housing crashes... NZ doesnt, so.

Australia (mainly Sydney and Melbourne) has housing crash too, but NZ we are duffurent!

Jim Rogers says : Be worried

https://youtu.be/2P0JXCSUMEk

Talks about reserve bank and people buying stock and properties at high price when economy fundamental going south.

Nor did NZ had such a panademic and lockdowns :)

So wait and watch.

Not to forget currently even America is experiencing housing boom just like NZ so.....

Not to forget currently even America is experiencing housing boom just like NZ so

This news has been bouncing around the water cooler. The evidence is sketchy, but nevertheless.

Exactly, opposite to what many keep saying as you mention NZ is not different to the US which is currently exposed to a housing crash already happening in places like NY city.

'Most economists are picking somewhere in the region of a 10% to 13% fall in GDP for the June quarter, although the Reserve Bank's been a bit gloomier than that with a -14.3% pick. It should be pointed out though that the RBNZ pick came out on August 12. So, more than a month ago. And a month has been a very long time in terms of picking where the economy's heading this year.'

To be noted : although the Reserve Bank's been a bit gloomier than that with a -14.3% pick.

Forcast in extreme much more than expected so when the data is better than worst expected (In this case 14.3%) will proclaim as good news to lift the sentiment (though even 12% or 13% will be bad) - Mind Game at play.

We have observed during the last 2 - 3 weekends that our local supermarkets and shopping centres are extremely quiet at the weekends - namely Sylvia Park and Eastridge Mission Bay (New World).... will be interesting to see the retail spending figures for September.

Same here. In Brisbane, Chermside (one of the biggest shopping centres in Southern Hemisphere), normally one could not get a park there in the weekend but lately you can just pick and choose a car park nearest to escalator!
Retail stores are hurting pretty bad!

Shopping centres have become social centres for the masses, and pity them. Malls are all the same, and their only appeal for me is shelter on a rainy day.

I personally couldn't think of anything worse, but it appears a good part of society dine out on going there; probably because nothing much else is happening in their life.

It's the decades of saturation advertising, training minds that consumption is a pastime, rather than a necessity to be endured. Of course many other more worthwhile pastimes have been discarded in the process.

True. The most advertised to generations in history.

Shopping centres have become social centres for the masses, and pity them. Malls are all the same, and their only appeal for me is shelter on a rainy day.

I personally couldn't think of anything worse, but it appears a good part of society dine out on going there; probably because nothing much else is happening in their life.

hold the bus -- dont be surprised if the figures are a lot better than expected - we are talking april to June -- and there was definitely a post lockdown spree --- some big ticket retailers - spas, pools, cars all reporting best ever figures -- hardware stores -- as many families invested in their property post lockdown having had to spend a couple of months at home!

Add to that - that the wage subsidy, mortgage deferrals and other handouts would have all hit the economy - and all been spent -- likewise a lot of money that would traditionally have gone abroad as the more affluent took holidays in sunny climbs - was spent in NZ - and the printing presses flowing -

could be as little as 5% tbh

Ahhh the latest narrative "Better than expected". Yep spend like there is no tomorrow because for many people there will be no tomorrow.

I don't know who is buying these houses? I certainly aren't, in fact I'm not buying anything full stop. Was made redundant in April, I'm a UX/UI Graphic designer...still can't find a job. Nuts. May have to become a Chippy or Concrete mixer driver...seems like all the government stimulus goes into the building, construction sector etc.

Just one big South Pacific money washing machine down here. Record amounts of money looking for a home. Literally becomes money buying a home in little old NZ. Don't think that the pine and cardboard house is actually worth 800k. Tulips bro.

Chin up buddy. Its not a poor reflection on you.

I've been there. It has an end date.

Concrete has the highest ROI out of all the trades.

Carpentry has one of the lowest ROIs. Go into concrete. Many concrete plants can't get workers under the age of 50 or 60. A local plant near us has a 75 year old guy on the tools as the owner can't get anyone younger or reliable to take over from him.

Most economists are picking somewhere in the region of a ..."

Haven't we learned today that economists can't pick a fall or rise or anything to do with houses? (Article on this site re Westpac flipflopping.) So why would they be able to do it with GDP?

Westpac economists are employed to provide estimates that senior management can utilise, either for decision making, or for jawboning the market with their Press Releases. I can still remember Eric Neal doing much the same in the early nineties with the poor results that Westpac had during this time with loans issued in FX.

Similarly, Stat NZ staff are employed to provide GDP estimates that politicians can utilise, either for justifying huge lockdown or for the upcoming election. I am not surprised to see single digit GDP drop this week for 2nd quarter.

Days to the General Election: 21
See Party Policies here. Party Lists here.