Statistics New Zealand confirmed on Thursday what has been apparent for some time: the New Zealand economy is slowing down. But how bad is it really?
Two consecutive quarters of negative GDP growth meets the technical definition of a recession, although that really only matters to the most pedantic among us.
A broader look at the economy shows ultra low unemployment (3.4%) and year-on-year GDP growth (2.2%) above the OECD average of 1.5%.
However, part of that GDP growth has been driven by an increase in the population as net migration has picked up. Economic activity on a per capita basis has fallen much further.
GDP growth adjusted for population growth shows a 0.7% drop in March and a 1.1% decline in December.
Real gross national disposable income per capita, a measure of individual spending power, fell 0.9% in the March quarter, adding to a 2.2% decline in the final quarter of 2022.
Those stats might help explain why a ‘technical’ recession can still be painful.
Nicola Willis, National’s finance spokesperson, said “red lights were flashing” for an “incredibly fragile” economy that was underperforming its peers.
Finance Minister Grant Robertson said such a small decline in the context of such severe weather damage actually demonstrated the strength of the economy.
“Today's outcome fits the definition of a technical recession by the barest of margins. But the resilience of the New Zealand economy, including historically low unemployment, means it will not have the impact that would normally be associated with this term,” he said.
Restore balance
Economists also saw different signals in the March data; some said it would be the start of tough times, while others thought it was little more than a rebalancing of the economy.
Kiwibank’s Jarrod Kerr and Mary Jo Vergara perhaps painted the bleakest picture, with predictions of further declines and an unemployment rate above 5% into 2024.
“Demand is being weighed down by rising interest rates. If households spend less, which is what we are seeing, then the economy will contract harder. If businesses pull back on their hiring and investment, which is what we’re hearing, then the economy will contract harder”.
The brunt of the slowdown was yet to come, they said, as the Reserve Bank tightened monetary policy too aggressively and the global economic backdrop was weakening.
On the other hand, Westpac senior economist Michael Gordon said the annual growth rate was right in line with the forecast.
The quarterly results were highly mixed across sectors, with no clear theme emerging behind the GDP decline.
“This fits with the idea of an economy that is in a transition phase, rather than in outright recession,” he wrote.
The biggest decline was in professional services which fell 3.6%, but that followed a 4.2% rise in the December quarter. Education services fell 1.9%, but due to teacher strikes.
Slowly slowing
Regardless of the noisy debate about what constitutes a recession, it was clear that the New Zealand economy was losing momentum.
“That’s to be expected—indeed it would be staggering if it didn’t happen—in light of the substantial rise in interest rates over the last two years,” he said.
Credit rating agency Moody's Analytics said the technical recession was partly due to disruption caused by the devastating cyclones and flooding.
“But the notable drop in business services over the quarter, which captured declines across numerous industries including advertising and professional services paints the picture of an economy running out of momentum,” said Katrina Ell, a senior economist.
She said the Reserve Bank (RBNZ) had been one of Asia-Pacific's most aggressive central banks, delivering a cumulative 525 basis points worth of hikes.
Core inflation and the labour market would be key indicators to watch in coming months as the RBNZ was “far from declaring victory” over inflation.
“At times like these, monthly data (rather than the extremely lagged quarterly figures currently released) would be invaluable”.
Moody’s expects NZ’s gross domestic product will shrink by 0.7% across 2023.
Sharon Zollner, chief economist at ANZ, said it was hard to diagnose the recession as anything other than a necessary adjustment after too much fiscal and monetary stimulus.
Unemployment is still at a near a record low, non-tradables inflation at a record high, and the current account deficit at unsustainable levels.
While hard to prove a counterfactual, she said the headline growth would likely have been positive if the cyclone hadn’t hit during the quarter.
Nothing to trivialise
Stephen Toplis, head of research at BNZ, said this recession was always inevitable and it demonstrated the Official Cash Rate had gone high enough.
“We are quick to note that the data continues to be very noisy, buffeted by cyclones, seasonal adjustment issues, teachers strikes and surges in migration and tourism inflows”.
Recent Ministry of Business Innovation and Employment figures show 17,319 people arrived in NZ on work visas in May. That's only down 5.1% from pre-Covid days in May 2019.
But BNZ believes the economy will have at least one, and probably two more quarters of decline before the year is complete.
Toplis said it was hard to sympathise with people who attempt to trivialise the economic correction as being purely technical or insignificant.
“Sure, the downturn has not resulted in a significant number of layoffs, nor is it likely to, but it doesn’t mean the correction that is occurring doesn’t hurt”.
Forestry and logging has now been declining for seven consecutive quarters and total manufacturing has declined for five quarters in a row. It is not technical for people in those sectors.
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