Covid recession 2.0? Surprise 1 per cent drop in GDP

Thursday, 18 March 2021

On a per-capita basis, New Zealand's gross domestic product fell an unprecedented 4.9 per cent in 2020.

New Zealand is probably almost six months into a recession after Stats NZ reported a surprisingly large 1 per cent drop in the country's gross domestic product during the three months ended on December 31, 2020.

ASB described the December-quarter figure as much weaker than expected and forecast it would “quash any talk of rate hikes and bring the risk of rate cuts back to the table”.

“The economy has not fared as well as previously believed through the Covid pandemic,” the bank said.

The decline in economic activity was worse than predicted by any of the five major banks, three of which had been forecasting a modest lift of between 0.1 per cent and 0.5 per cent for the quarter.

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The figure means Stats NZ has now been able to calculate that GDP was 2.9 per cent lower in 2020 than in 2019, at $322 billion, and down 4.9 per cent on a “per capita” basis once adjusted for the country's larger population.

Population numbers were boosted by strong migration during the first three months of the year before the shutters came down on new arrivals.

Bank of New Zealand, Westpac and Kiwibank had all been forecasting GDP to drop in the current quarter ending on March 31, prior to the fourth-quarter release.

If those predictions prove correct, New Zealand is in a technical recession that started on October 1.

A recession is generally defined as two quarters of GDP decline.

The 2.9 per cent annual decline in GDP, while severe, remains far lower than the dire predictions made by most economists early on in the Covid crisis.

The OECD had forecast in June that the New Zealand economy would take a 9 per cent annual hit.

It is also mild compared with the decline in most developed economies, especially in Covid-ravaged Europe.

The National Party believes the economy is paying a price for the Government not getting infrastructure projects in motion fast enough.

“The dip is similar to Australia but much less of a fall than seen in the European Union or UK,” Stats NZ senior manager Paul Pascoe said.

The United States economy declined 3.5 per cent last year, while Britain’s GDP crashed 9.9 per cent.

Finance Minister Grant Robertson said it was not surprising that numbers were “jumping around”.

“The world is dealing with the ongoing impact of Covid and there will be volatility for some time.”

But he said the data showed the economy “remains resilient”.

The major banks had forecast a more modest decline or a small rise in GDP, and ASB believes the 1 per cent drop will take talk of interest rate hikes off the table.

National Party shadow treasurer Andrew Bayly said a lack of infrastructure investment appeared to be behind a 10 per cent drop in construction during what was “normally the busiest time for our infrastructure sector”.

The Government had shown “an inability to deliver”, with work having begun on only 49 of its 205 shovel-ready projects that were soon supposed to under way, he said.

ANZ said it did not believe the new figures should change the economic narrative.

“A fair amount of the quarterly contraction appears to be industries recoiling from strong expansion during the third quarter as they bump into capacity constraints, rather than signalling a change in the direction of underlying economic momentum,” it said.

Pascoe said economic activity in the fourth quarter painted a mixed picture, “with some industries down” but others picking up despite the ongoing impact of Covid.

The overall GDP decline was primarily due to a drop in activity in the construction sector and the retail and accommodation industries after a strong bounce-back from those sectors in the three months to the end of September 2020.

Residential building activity grew and the construction market remained at a historically high level, but the increase in home building was not enough to offset a drop in the commercial construction sector.

“Business activity ranging from hotels and motels to restaurants, cafes and bars faced much lower activity in calendar year 2020 than in 2019, with far fewer international tourists in the country because of border restrictions,” Pascoe said.

Infometrics economist Brad Olsen warned prior to the fourth-quarter GDP result that there was the potential for a technical recession, saying GDP numbers were likely to be quite “jumpy up and down this year”.

Despite the GDP disappointment, Westpac economist Satish Ranchhod said New Zealand had experienced one of the swiftest economic rebounds from Covid-19 and was on firmer economic ground than many of its trading partner economies.

“However, we expect economic activity will remain below its pre-Covid trend for some time yet,” he said.

“With the domestic economy having already recovered its lost ground, further growth will be harder to come by in the coming year.”