Okay, it's officially 'avert your eyes time' again.
Yep, the latest GDP figures (for the December 2023 quarter) are out in the coming week, on Thursday, March 21 - and they are not likely to be flash.
Consider if you will, what the previous four quarters have brought us:
No, not particularly pretty reading. But we were warned. We were warned that an at least semi-tanking economy would be the consequence of the Reserve Bank (RBNZ) trying to squeeze the life out of inflation by cranking the Official Cash Rate (OCR) up all the way from just 0.25% to 5.5%. And so it is.
The intention of what the RBNZ has done is to slow spending and activity so the heat comes out of the economy and inflation comes down. And it IS working. Inflation's still way too high for now (annual rate 4.7% as of the December 2023 quarter). But that's down from a high of 7.3% in June 2022. It IS on the way down.
Anyway, as you can see, three of the four quarters gone saw the economy contracting. As we know, two consecutive quarters of negative GDP is regarded, in a pretty simplistic kind of way, as a 'technical' recession.
The release of the September quarter GDP figures in December was a bit of a doozy - since it revealed, due to extensive prior periods revisions, a 'recession' we didn't know we had earlier in the year, and also revealed a rather nasty surprise fall of 0.3% for the September quarter. The RBNZ had picked 0.3% growth.
Clearly, the RBNZ was a bit perturbed. In a February Monetary Policy Statement (MPS) that was much less 'hawkish' than had been expected the RBNZ's OCR-setting Monetary Policy Committee commented:
Members noted that gross domestic product (GDP) declined by 0.3 percent in the September 2023 quarter. This was weaker than projected in the November Statement. Revisions to GDP going back several years imply that potential GDP – the amount of production that the economy can supply sustainably – has also been lower than previously assumed. On net, these factors imply that the starting point for capacity pressures in the New Zealand economy is only slightly lower than previously assumed. The Committee discussed the low rate of productivity growth implied by recent GDP data. If sustained, lower productivity would contribute to a lower rate of potential growth of the economy. This would limit the rate at which the economy can sustainably grow without generating inflation.
So, the coming week's GDP figures are going to be of, shall we say, more than passing interest for the RBNZ. The RBNZ wants a slowing economy - not one that is getting down on to its knees.
If the December quarter figure happens to have a minus in front of it, we will of course have once again recorded two consecutive negative quarters. But, we should not get distracted by that, unless its a really BIG negative - IE another -0.3%. But nobody's forecasting such a dire outcome - that I'm aware of.
The fact is regardless of whether there's another negative or not, the real point is that any figure we get will show an economy performing in a very underwhelming manner. And remember also, the NZ population - courtesy of surging inbound migration - increased 2.8% last year. That's right, there's a whole lot more people driving the economy and yet it's going nowhere. So, on a per capita basis our GDP is really flagging.
In its February Monetary Policy Statement the RBNZ's forecast figure for GDP for the December quarter was 0.0%. If the RBNZ's right we will have averted another 'recession'. It's just that our economy won't be growing either. So, big deal.
"Flat as a pancake" is the title Westpac senior economist Michael Gordon has chosen for his preview of the GDP figures. He's picking a 0.0% outcome as well.
"If our pick for the quarter is correct," Gordon says, "that will also mean that the economy has been dead flat over the last year. (Indeed, given that the seasonal adjustment factors for GDP are still in flux, we would put more stock in our annual growth forecast than in the quarterly one.)
"That’s happened at a time when the country has seen the strongest population growth in its modern history, with inward migration playing catch-up after three years of the border being closed.
"As a result, GDP per person has fallen by almost 4% from its peak," Gordon says.
"Normally, a fall of that size would be associated with a severe recession. But in this case it reflects how overheated the economy had become in the first place."
ANZ senior economist Miles Workman said overall, the ANZ economists' expectation that the economy expanded 0.1% in the December quarter is driven by:
- Services industries (around two thirds of GDP) lifting 0.1% q/q (making a 0.1ppt contribution to headline growth).
- Goods-producing industries expected to contract 0.2% q/q (making a flat (0.0%pt) contribution to headline growth at one decimal place).
- Primary industries expected to contract 0.3% q/q (with its contribution to headline GDP also coming in flat).
Workman said by their forecasts, the fourth quarter of 2023 will mark five consecutive quarters of negative per capita GDP growth, down 3.7% from Q3 2022.
"And with net migration still very elevated, we think this measure has further to fall over coming quarters.
"For context, per capita GDP contracted for seven consecutive quarters (4.2% peak to trough) following the Global Financial Crisis."
BNZ head of research Stephen Toplis and senior economist Doug Steel say in their GDP preview that they judge GDP rose 0.1% in Q4.
"If that comes to pass, we will let others debate whether that means NZ was in recession or not in the second half of last year (after Q3’s -0.3%) – and whether subsequent revisions change that prognosis," they say.
"We will stick with our now well-worn line that growth last year was bumping along the bottom. A quarterly outcome as we see it would result in annual growth steadying from -0.6% in Q3, to 0.1% in Q4. That’s anaemic. And cements the idea of the per-capita recession rolling on."
Taking a quick look at the details for the quarter by industry, the BNZ economists say negativity seems to have been centred in the distribution sectors of retail and wholesale trade along with the associated transport and storage industry.
"Construction might hold up in the quarter, judging by last week’s not-as-weak-as-expected building work figures, even if looks to be within a broader downtrend."
Toplis and Steel say there remains "considerable noise" in the quarterly data, such that they certainly wouldn’t rule out the possibility of another negative quarter in GDP itself.
"But, to be frank, the difference between -0.1% or +0.1% is well within the margin of error."
Kiwibank economist Sabrina Delgado is expecting a flat (IE 0.0%) result, but also points out the GDP-per capita issue.
"...Aggregate output may be unchanged, but for the average Joe or Jane, the numbers will likely show a shrinking slice of the economic pie. So, on the ground, it will still feel like a recession," she says.
She says weakness will be notable "across the board".
"We are expecting the goods producing industry to continue in decline as manufacturing remains a sore spot and a still- lukewarm housing market weighs on construction. Activity within the primary production industry is also expected to be weak. Meanwhile, service industry also continues to be weighed down by businesses and households that continue to pull back."
But she says the turning point is on the horizon. "2024 may not be the year of growth but it is the year of central bank rate cutting."
It shouldn’t be too much longer before the RBNZ can cut rates here.
"We’re pencilling in November. And expect to see growth pick up into 2025 as rate cuts are delivered and stimulate domestic demand."
Economic growth
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59 Comments
The intention of what the RBNZ has done is to slow spending and activity so the heat comes out of the economy and inflation comes down. And it IS working.
RBNZ are doubtlessly slowing spending and activity, and tanking the economy (I still think we will see a negative QoQ - zero at best). But, is that lower demand driving down inflation? I seriously doubt it. Our inflation is tracking other advanced economies - actually a little bit behind. Why are we lagging? A few reasons:
- Our uncompetitive markets are not passing on lower import prices to consumers as quickly as in other countries.
- Higher interest rates are pushing on prices across many sectors
- Inward migration is pushing rents up (which puts upwards pressure on wages)
- Local Govt rates and insurance costs are going bananas (infrastructure mess and higher risks)
- Our energy markets are broken
- Excise duties (e.g. on tobacco) are also a factor
How could we test this lower demand, not pushing prices down hypothesis? One thing to look at is the net operating profits of our construction, retail, and wholesale sectors - the bulk of our economy, and where so many of our prices are set. If lower demand was slowing price increases, you would expect to see lower profits and specifically lower profit margins as businesses drop prices to stay afloat, right? What you see in all these three sectors is lower nominal profits but profit margins that are only a percentage point or so down from their 2021/22 highs. Margins are basically stable at pre-COVID levels (wholesale 8%, retail 6%, construction 12%). How come? Because our uncompetitive markets reduce capacity not prices when demand drops. Granted, some businesses are discounting and clearing stock (e.g furniture) but they are minor influences on inflation.
My view is that we are getting all the downside of lower demand (job losses, higher welfare costs, building slump) but basically none of the supposed upside (lower cost of living). In fact, for many households, higher mortgage and rent costs are making people feel like 'inflation' is still raging hot - worse than ever.
Good comment! Had it not been for HFL interest rates, debt ridden Councils would be less inclined to pass on double digit rate increases just to keep the lights on, higher wage setting pressure wouldn't be so intrenched and deeper fiscal pressure on Government wouldn't be as bad through lower tax revenue. Lets hope it doesn't take a "out of left field" bust to kill off inflation (like has happened in the past).
Yes, that's right. Higher prices increase the cost of living, and higher interest rates amplify that effect. It's a really clumsy and inequitable way of lessening demand, think about it, we:
- Increase the living costs of people in debt so that they can't buy as much stuff and persuade people with lots of money to stash it in term deposits so that they don't spend it
- Make investment in expansion, buildings etc expensive so that businesses don't do as much (note that this also restricts supply and productivity improvements)
- (1) and (2) combine to lower demand and push people out of work. We then cross our fingers that this will result in slower wage and therefore price increases.
Indeed. If only the banks acted responsibly by not lending if you cannot afford it, and actually foreclosing on those who are clearly failing to service debt. Instead they have allowed the system to be at risk due to the debt bloat in favour of their own profit from endless debt enslavement.
Instead we approach a massive debt overhang that could cause a 1987 like impact, and a decade of following austerity.
Indeed. If only the banks acted responsibly by not lending if you cannot afford it, and actually foreclosing on those who are clearly failing to service debt. Instead they have allowed the system to be at risk due to the debt bloat in favour of their own profit from endless debt enslavement.
The banks are in a bind.
They are the core driver of the Ponzi - without them, it couldn't exist. Yes, of course you need willing borrowers, but only the banks have the ability to create the credit out of thin air. Now, the banks need to satisfy their stakeholders; primarily shareholders. Therefore, revenues and profits need to be increasing to maintain a level of dividend payments. So the banks have to either do two things: 1. Lend greater volume of credit; or 2. Increase the margin on that credit.
Now, we know from all the squealing, 2 is at the point where the pain is too hot. So 1 is the better option. But the problem here is that the mortgage borrowing demographic is the most indebted in history (not just Nu Zillun, but across the Anglosphere). Your ideal customer for generating optimal debt servicing has been strangled. Blind Freddy could have seen this coming, except the people who the sheeple look to in the media, bank economists, etc. They were drunk on short-term thinking and our exceptionalism (and probably the China miracle as well).
Your suggest that this could be like 1987. Let me suggest to you that the size of the debt between then and is like comparing Mt Eden to Mt Cook.
What you see in all these three sectors is lower nominal profits but profit margins that are only a percentage point or so down from their 2021/22 highs. Margins are basically stable at pre-COVID levels (wholesale 8%, retail 6%, construction 12%). How come? Because our uncompetitive markets reduce capacity not prices when demand drops.
Funny you say this as after talking to a friend who works for part of the supermarket duopoly and has access to their data for at least the store they are part of, they advised that they always keep their margins. Likely why we see lower quality unbranded products replacing those that there were bigger margin on and demand dropped off for, and less variety in goods (anecdotally) than 2 years ago.
Yes - that is an important detail - retailers bringing in cheaper products. My favourite current example is the much cheaper Pams butter sat next to hideously expensive Anchor butter. Apparently, the supermarkets win both ways because they sell lots of the cheap product, but their snobbier customers fork out for the expensive premium brand and pay a hefty margin. They call this an anchor pricing strategy (not because of the butter!)
Interesting example re Pam’s butter.. my wife is a consummate cook.. she comments that having tried Pam’s butter, that it does not work in producing good results with her baking.. she swears by ‘mainland’ butter… perhaps Pam’s butter has too much water content was her unsubstatiated comment ? Perhaps there does need to be a ‘quality ‘ test / ‘blind tasting’ of butter to check this theory ?
The way previous quarter figures have been adjusted lower over time then the last couple of quarters including this one could cement in a technical recession fairly easily. Still waiting to see what happens once the 10-2yr yield curve reverts back to positive. (May actually be the 10y-3mth that is the more accurate leading indicator).
Ah. Yes. That article doesn't explain it well. I posted an attempt to explain it better on today's Breakfast Briefing.
See the reply to nktokyo.
https://www.interest.co.nz/economy/126872/japans-negative-rate-faces-en…
Falling per capita GDP has been the elephant in the room since the 1970s. It's the long run driver of our standard of living but very few people ever discuss it. But then, why would we when we can all bury our heads in the sand and distract ourselves by buying and selling houses to each other.
Because we've been able to simply spend the last couple of decades not feeling it by living beyond our means and passing the cost to following generations to pay - via housing policy.
We've avoided feeling our poorness by running up credit we expect the youngsters to pay off.
As an immigrant, I suspect the average immigrant lifts the 'average' more than the average Kiwi. My view is biased but in my work we have English (me), Chinese, Thai, Indian, Russian and a Swede. Tertiary qualified and earning well above an average/median income. Kiwis drag NZ down.
Total growth (in extraction, consumption and excretion) is a figure.
But this reporter nails another point: So too is per-head extraction/consumption/excretion.
And for a long time - 20 years or longer - the latter has been reducing. Politicians, indeed a lot of folk including in the media, have doggedly clung to 'total'; often associated with optimistic vernacular.
So it does make sense, and 'appalling' is as irrelevant as those oft-used 'optimism' words.
Global physical Limits are imposing themselves now, and - inevitably, given that the collection of infrastructure has never been bigger - entropy is impacting too. The elite don't want the masses realising they're getting ever-worse-off, but it shows in the end. Phrases like 'cost of living crisis', and 'housing crisis' hide what is really a population crisis.
There is still potential everywhere PK
Look up and see how with simple techniques deserts are transformed into productive fertile areas. Everyone must keep doing their bit instead of gimme gummed social welfare
There I covered both pillars of Green Party politics, sustainable and social
Much of the global desert, was once fertile. It was human activity which degraded it.
And ex fossil energy, even the claimed reclaiming (much of which is greenwash and much of which dies off) we aren't going to do anything about reversing desertification.
Spin 101 detected - accuse them of what you're guilty of yourself.
BS comments unless you want to look back before humans existed... and I wonder what you know about vegetating deserts using simple landform
We are here now, so where are you going. You blame couples for having children... you had children and those ones are having more children 🤣
https://www.britannica.com/science/desertification
https://www.unccd.int/land-and-life/desertification/overview
https://www.ipcc.ch/srccl/chapter/chapter-3/
'More recent estimates, based on remotely sensed data, show that about 24–29% of the global land area experienced reductions in biomass productivity between the 1980s and 2000s (Bai et al. 2008'
corresponding to about 9.2% of drylands (±0.5%) experiencing declines in biomass productivity during this period (low confidence), mainly due to anthropogenic causes.
https://en.wikipedia.org/wiki/Desertification
The expansion of the Gobi is attributed mostly to human activities, locally driven by deforestation, overgrazing, and depletion of water resources, as well as to climate change.[39]
ttps://www.nature.com/articles/s41467-020-17710-7
https://sustainabledevelopment.un.org/topics/desertificationlanddegrada…
https://www.sciencedirect.com/science/article/abs/pii/S0309170812000231
https://wad.jrc.ec.europa.eu/introduction
The problem comes when you start out from a held falsehood. That quickly compounds, as you have to dent more and more, to try and keep the initial falsehood 'alive'. Thus you end up denying human impact, in multiple arenas - climate, land degradation, etc etc etc. Your posit becomes less and less plausible, each step, and you end up looking silly.
Humans are desertifying - and degrading, as per NZ in the last 50 years - orders of magnitude more than we are repatriating; it goes with being a dissipative life-form, levered manyfold by fossil energy.
In a nutshell: NZ's tax system & business 'acumen' means it is simpler and easier to add another (cheap) body to increase production than it to actually invest in new plant and machinery to provide an enduring increase in production capacity. (Opex vs. Capex)
Case in point? I was proof reading an economic analysis comparing aged home care in NZ to other developed countries. Their ratio of nurses to patients is way lower than it is in NZ. Why? Two primary reasons: 1) NZ does not invest in labor saving devices so two or three nurses are required to perform the function that just one does in developed countries, e.g. patient lifting. 2) NZ does not invest as much in preventative care, e.g. devices that prevent bed sores, so more nurses are required to treat ailments in NZ that would happen far less in developed countries. (The report went to management and was not even read by half and the other half ignored it. It now sits in a digital vault gathering dust.)
i genuinely think that importing workers to work in retail, restaurants, cafes etc, does not add to GDP in a meaningful manner. Other than immediate spend on setting up a household with a GST boost.
If a bottle store has to close because of a lack of workers at the minimum wage. GDP will not fall. Those who wish to buy alcohol will simply purchase elsewhere. The same with cafes. If a cafe is no longer convenient, they will spend said dollars elsewhere, or pay down debt or save. With the last two options benefiting the economy long-term.
Recession, no recession, 'technical' recession.........it's all pretty meaningless. Just ask avergage Joe what they think. Times are difficult and getting harder, everything is costing more and many are really starting to struggle.
A headline stating "We are not in a recession" does nothing to dispel their fears, quite the opposite.
As usual NZ treated as if it has no international input to its economic situation
Er has it been noted that China, EU and Uk and Japan all have nil or lying about it growth?
Yet we always told jam tomo when rates go down. Rates won’t go down enough to make a difference unless rest of world improves and there is little to suggest it will
Not sure what that means. Are you blaming other countries for the mess that NZ is in? Rates in China and Japan are already down. In the case of Japan, they've been down forever and a day. And if you're suggesting that we've been relying on wholesale funding for credit, actually that's not correct. Aussie banks used to use wholesale funding from Japan for residential property lending but it was quite insignificant.
In the table above we have the following quarterly growth rates:
Dec-22 -0.6%
Mar-23 -0.2%
Jun-23 +0.5%
Sep-23 -0.3%
So we have 4 quarters with with 3 of them being a negative growth rate and yet the annual growth rate at Sep-23 is a positive 1.3%?
Am I having a senior moment? Anyone like to explain that too me? What am I missing and/or haven't been told?
A real PM eats theirs with the skin on
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