This week's December quarter GDP figures will show a recovery from the sharp fall in September but all eyes will be on what the figures point to in the more problematic months ahead

After the drop comes the bounce.

And the New Zealand economy is expected to have bounced back quite well in the December quarter after being smacked around, particularly by the Auckland Delta lockdown in the September quarter. The economy contracted by 3.7% for the three months.

Statistics New Zealand releases the December quarter GDP figures on Thursday and economists - based on encouraging 'lead indicator' data released ahead of the GDP figures believe that the bounce back will be better than the Reserve Bank's February forecast of 2.3% growth. In fact it may well come in above 3.5%.

But of course, these figures are already quite old. Since the end of 2021 we've had the rampant outbreak of Omicron, which will have severely crimped spending. Inflation is now soaring and there's the huge complication of Putin's War to throw into the mixer.

So, in a sense the December quarter figures and the extent to which they show a strong bounce back from the September fall will only indicate how well placed we were and are to cope with what will be a volatile next few quarters.

And, indeed, ANZ senior economist Miles Workman and economist Finn Robinson in their preview of the GDP figures suggest we should "brace for volatility".

They say the four quarter 2021 GDP data will show a mix of pent-up demand and a partial normalisation in activity following the September quarter's lockdown-induced contraction, and they have "pencilled in" a 3.5% bounce for the economy.

"But let’s not get out the bubbly just yet. After all, these data are already ancient history in a rapidly changing and geopolitically tumultuous world. And while growth may well come in ahead of the RBNZ’s February MPS forecast of 2.3% q/q, with Omicron now rife, extreme inflation gobbling up household incomes, geopolitical tensions weighing on global sentiment, and housing having turned definitively downwards, strong growth in Q4 will only lower the hurdle for a technical recession over the first half of 2022."

In terms of the detail in the fourth quarter GDP figures, they say the rebound  is expected to be relatively strong across the industries that contracted sharply in Q3. They expect that ervices industries (around two thirds of GDP) are expected to recover 2.7% q/q following Q3’s 2.7% contraction. They've pencilled in a 7.0% q/q rebound (Q3: -7.3%) for goods-producing industries, and primary industries are expected to lift 0.4% (Q3: -3.1%). And they say recent primary industry weakness has been more a function of the weather than lockdown.

But the Workman and Robinson say further solid expansion in the current March quarter is looking less likely.

"Indeed, the outlook for economic activity is souring. Living cost pressures are extreme right now. And there’s more inflationary pain to come, with global developments adding more petrol to the fire, and the Omicron outbreak adding to labour scarcity. Inflation is now running laps around wage growth, meaning households are going backwards at an alarming rate. Meanwhile, many businesses are facing reduced demand as people stay home, and the housing market softens. While Omicron wobbles will hopefully be short lived (as has been the case abroad), it’s clear that economic momentum has turned."

And they say there may not on this occasion be relief from the RBNZ. They say that unlike past economic cycles, a softening demand pulse on its own may not be enough to derail OCR hikes – "especially given that one reason for demand falling is the impact of surging cost pressures, with more in the pipeline given the incredibly tight labour market".

"It won’t be comfortable, but aggressive rate hikes may well be the best option to prevent inflation expectations from becoming unanchored, avoid a damaging wage-price spiral, and lean against the inflationary impacts of upcoming additional fiscal stimulus. There is of course a risk that the RBNZ ends up oversteering and causing a hard landing, but taking that risk is looking like a lower-regret scenario than being behind the curve for much longer and risking compromising inflation-targeting credibility."

Westpac acting chief economist Michael Gordon is expecting a 3.8% rise in GDP for the December quarter.

"The extent of the rebound in the December quarter data has come as a surprise to us. Keep in mind that the previous quarter was a game of two halves – the economy was going great guns in the first half, with the second half spent at varying Alert Levels (with Auckland in Level 4 lockdown for most of that time) in response to the Delta outbreak. That left a 3.7% hit to GDP over the September quarter as a whole," he says.

"Meanwhile, the December quarter was characterised by a gradual easing of Covid restrictions, including the move from Alert Levels to the ‘traffic light’ system. However, at no point were health restrictions as permissive as they were prior to the Delta outbreak. This suggested that the average level of activity over the December quarter wouldn’t be much higher than the September quarter average, and indeed, early indicators such as card spending seemed to confirm that. But more recent data has shown a marked resurgence in activity across many other sectors, particularly in the goods-producing sectors where Covid restrictions were less inhibiting."