GDP drop of 3.7% in face of Delta lockdowns evidence of economic 'resilience'

Thursday, 16 December 2021

The third-quarter GDP figure is one part of a puzzle that has left economists guessing about the strength of a rebound.

The economy has out-performed most economists' expectations once again, shrinking 3.7 per cent in the September quarter when most analysts had been forecasting a bigger drop due to Delta lockdowns.

The fall was the second-largest on record but nonetheless Finance Minister Grant Robertson said the gross domestic product data showed the resilience of the economy in the face of the impact of the Delta outbreak.

Kiwibank warned the smaller-than-expected decline in GDP during the July to September period was another reason to expect higher interest rates in the months ahead.

BNZ research head Stephen Toplis also said it reinforced the case for the Reserve Bank to keep removing the stimulus provided by the low official cash rate, which currently sits at 0.75 per cent.

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But, in general, banks are down-playing the implications for future monetary policy, suggesting instead that the main takeaway is comfort that firms have got better at operating through Covid-19 restrictions.

Stuff Business Editor Susan Edmunds is joined by Infometrics chief forecaster Gareth Kiernan and principal economist Brad Olsen to talk about what’s really happening in the economy.

Nevertheless, the fall was the second-largest on record, which in this case is since Stats NZ began collating GDP figures in their current form in 1986.

The Treasury’s secretary Caralee McLiesh had said on Wednesday that it expected the quarterly hit to GDP would be 6 per cent, while the Reserve Bank – which has proved to be consistently pessimistic in its forecasts this year – had predicted a 7 per cent decline.

Both institutions finalised those forecasts in November, after which banks – which ended up being closer to the mark in their estimates – began scrambling to revise up their own predictions.

The Treasury has predicted 0.8 per cent GDP growth over the year as a whole to the end of June, with strong growth of 4.9 per cent the following year.

ANZ said the “relatively small contraction” in the September quarter suggested many businesses had learnt to operate better through lockdowns, compared with 2020.

“The Reserve Bank will likely look upon today’s data with interest, but know full well that it carries little insight insofar as assessing appropriate monetary settings,” it said.

ASB senior economist Jane Turner said a key question was how household spending held up next year in the face of headwinds including the higher cost of living and higher interest rates.

Uncertainties hanging over the local and global economy include the impact of new Covid variants such as Omicron and the continued removal of “emergency” monetary policy measures put in place last year in New Zealand and around the world.

The United States Federal Reserve announced on Thursday morning, New Zealand time, that it anticipated hiking US interest rates three times next year to a still-low 1 per cent, in response to strong US inflation which currently stands at 6.8 per cent.

But the US Fed’s announcement failed to unnerve share market investors, which sent the S&P 500 Index 1.6 per cent higher to 4710 points.

After US markets closed, the index went on to hit a record high of 4717 points in futures trading later in the day.

At the same time as releasing the September quarter GDP figure, Stats NZ revised down its estimate of growth in the previous June quarter, from 2.8 per cent to 2.4 per cent.

Stats NZ said the GDP decline in the September quarter reflected a widespread drop in economic activity due to Covid alert level restrictions and the nationwide lockdown implemented in the second half of the quarter.

Senior manager Ruvani Ratnayake said the impact was felt the heaviest by retailers, accommodation providers, restaurants, manufacturing and construction firms, and those in involved in the arts and recreation.

Household consumption expenditure and investment expenditure fell by 7.5 per cent and 5.3 per cent, respectively, during the quarter.

“Households spent less on services such as eating out, accommodation and domestic travel, and less on durable items such as clothing, motor vehicles, furniture, and audio-visual equipment,” Ratnayake said.