Statistics New Zealand says there was a 'widespread drop in economic activity' in the March quarter; the fall was bigger than economists' estimates; worse is to come in the June quarter

The economy shrank by 1.6% in the March quarter - the biggest fall for 29 years - as the Covid-19 crisis started to bite, according to Statistics New Zealand figures.

The drop, which is seen as a foretaste of much worse in the June quarter, was still bigger than economists had estimated.

The March quarter’s GDP results showed a widespread drop in economic activity as travel restrictions took hold and the country moved towards lockdown, which began at the end of March, Stats NZ said.

Covid-19 effects came on top of the smaller impact from drought in some parts of the country.

“The 1.6% fall surpassed quarterly falls during the global financial crisis in the late 2000s,” national accounts senior manager Paul Pascoe said.

“It is the largest quarterly fall since the 2.4% decline in the March 1991 quarter.”

ASB chief economist Nick Tuffley and senior economist Jane Turner, who are forecasting a 17% fall in June quarter GDP noted that the fall in first quarter GDP was less severe than the Reserve Bank had expected (it expected -2.4%).

"We also expect the RBNZ will be revising its GDP forecast for Q2 higher as well, particularly given that NZ has transitioned into Alert Level 1 faster than expected and recent economic indicators have been very encouraging.

"We expect Q4 GDP will be 6% below that of the previous year’s level, which compares to the RBNZ’s May [Monetary Policy Statement] forecast of a 4.5% contraction.  The fall in H1 GDP may not be as steep as the RBNZ forecast, but the degree of bounce back over the rest of the year may be a little slower than what the RBNZ predicted in May."

ANZ senior economist Liz Kendall, who is picking a 19% fall in second quarter GDP, said now the economy has been able to exit lockdown "we are now experiencing a bounce in activity from pent-up demand".

"But the worst of the economic impact is still coming for many: unemployment is rising and many firms are experiencing difficulty, with a tourism-shaped hole difficult to fill and impossible to ignore.

"The recession will start to become evident in more lasting ways, even though the dent in GDP is past its worst.

"We will be watching Q3 high-frequency data, the housing market, business sentiment and household spending closely to get a sense for underlying economic momentum. That’s where we need to be looking to get a sense of the scope for recovery from here. While things are starting to look up, a weaker trend is expected in time, and downside risks should not be ignored."

The detail:

Service industries contributed the most to the drop in activity in the March quarter, making up almost half of the overall fall in GDP. The hospitality industry (accommodation, restaurants, and bars) was among the most affected industries, falling 7.8%, as tourism fell after the border was closed to slow the spread of Covid-19. 

The construction industry fell 4.1% and the transport, postal, and warehousing industry fell 5.2%. These falls reflected the impact of lockdown measures as building sites shut down and non-essential workers were told to stay home. Parts of the transport industry, such as air transport, were also affected by the restrictions on travel.

Household consumption expenditure fell 0.3%. Spending fell on long-lasting products (durables) such as motor vehicles.

A fall in services, driven by accommodation, international and domestic air passenger services, and recreational services, reflects the drop-off in travel as the pandemic spread.

Households were not able to buy non-essential goods and services as such businesses shut down.

A strong increase in spending on short life-cycle goods offset these falls, as households prepared for the lockdown by buying supplies, from flour to toilet paper.

The different results for consumption of durable and non-durable items showed the changing behaviour of consumers in response to Covid-19, Stats NZ said.

How we compare

New Zealand’s 1.6% decline in economic activity in the March 2020 quarter compares to a 0.3% fall in Australia. In the same period, there was a 2.1% decline in Canada, a 0.6% decline in Japan, a 2.0% decline in the United Kingdom, and a 1.3% decline in the United States.

Annual GDP growth for the year ended March 2020 dropped to 1.5%, compared with a 3.1% growth in the year ended March 2019. Annual growth in GDP has been generally slowing since December 2016 when it was 3.9%.

Economists have commented that the rapidity of the economic slowdown, followed by the ceasing of much economic activity during the lockdown, would be hard for Stats NZ to measure.

Stats NZ said with its news release on Thursday that the data sources that are available on a timely basis determine the methods used to compile Stats NZ’s estimates of quarterly GDP.

"The unprecedented nature of the rapid economic shock caused by the COVID-19 lockdown has meant that some data sources and methods have had difficulty measuring COVID-19 related effects.

"Stats NZ has reviewed all data sources and methods and, using supplementary data sources, has compared and confronted them. Doing this has helped Stats NZ understand the level of activity in the quarter and apply informed adjustments where they were needed."