The country is set to see its largest ever contraction in the economy reported this week - but the final figure's actually expected to be much smaller than first feared and the focus is already on how much the economy will grow by in the September quarter

Look out! It will be big and it will be ugly.

June quarter GDP figures to be released on Thursday (17th) this week will show a record quarterly drop in economic activity.

But if you want to take a glass half full look at things, the GDP figure that's set to be recorded later this week is actually not going to be anything like as bad as first feared (with a fall in excess of 20% suggested). 

And the fall, for the June quarter, is already largely historic - to the point where much of the attention already is in how big the recovery already under way in the September quarter will be.

The June quarter drop will confirm the country as being in recession, if such confirmation was really needed, as the 'technical' description of recession is two consecutive quarters of negative GDP growth. Remember that the March quarter saw a 1.6% drop.

Most economists are picking somewhere in the region of a 10% to 13% fall in GDP for the June quarter, although the Reserve Bank's been a bit gloomier than that with a -14.3% pick. It should be pointed out though that the RBNZ pick came out on August 12. So, more than a month ago. And a month has been a very long time in terms of picking where the economy's heading this year.

September bounce-back

The September bounce-back in the economy is expected to be similarly vigorous, also of double digit size. The RBNZ's picking +12.2%, although for the whole of 2020 its pick is that the economy will shrink by 5.8%. 

BNZ economists are picking a -13% figure for the June quarter, taking activity levels to 13.3% below where they stood in June 2019, BNZ head of research Stephen Toplis said.

"If we are right then the data will confirm that the hit New Zealand took from its lockdown was one of the worst in the developed world."

Toplis said the biggest sectoral declines will have occurred in tourism, hospitality, arts and recreation, rental hiring and real estate services. Few sectors will have escaped scot free though there is a chance that agriculture, telecommunications, and government will reveal modest growth.

"The importance of the GDP data is in establishing the base from which the economy is now accelerating. But, frankly, we are much more interested in how fast the economy can recover to its pre-covid levels than we are in the extent of the initial gap."

The economics folk at Kiwibank have, as usual, come up with a lively description for what's to be released on Thursday (17th) with "Gross Domestic Plummet". 

They are picking a 12.5% drop, with a 10% rise to come for the September quarter.

"It's important to note that the second quarter decline will (likely) be shallower than we (all economists) had initially expected," the Kiwibank economists say. (For the record, they had originally forecast an 18% drop).

"And the bounce back into the current third quarter will be vigorous..."

'Strong activity out of lockdown'

They point out that the the large declines in the initial nationwide lockdown, "were followed by surprisingly strong activity out of lockdown", while Auckland's subsequent lockdown "was less severe".

'What lies ahead is of much more importance than what happened last quarter," they say.

"We are almost at the end of the third quarter. A decent rebound in activity is expected in Q3 and we are picking a 10% [quarter-on-quarter] jump. Despite Auckland's level three lockdown the economy continues to recover. Spending did exhibit a small dip from the Auckland lockdown but has since rebounded strongly. Our longer-term forecasts of GDP are picking a return to pre-covid levels of GDP by early 2022."

One of the key things to look out for in future months and indeed possibly further ahead than that will be for revisions to the GDP figures. Nobody expects that the release on the June quarter this week will be the end of the story - simply because of the difficulty Statistics New Zealand had pulling all the information together during the lockdown.

Significant revisions ahead

ANZ senior economist Miles Workman says revisions to the data over the next year or so could end up being just as significant as any forecast “miss”.

"Stats NZ’s sources and methods were not developed with lockdown in mind, " he says.

Workman says the 12% pick for contraction ANZ economists have pencilled in for second quarter GDP will see the economy back at levels last seen in 2015. Per capita GDP will be cast back even further – to levels that prevailed in 2005.

"However, given how rapidly this crisis has evolved, Q2 is already beginning to feel like ancient history. We’re now in the final month of Q3, a quarter that’s likely to bring the sharpest quarterly economic expansion we’ll ever see. That’s despite being hindered by renewed lockdown measures, which will leave the level of GDP lower than otherwise and keep the data noisy for the rest of 2020."  

The rebound is crucial

Westpac economists are picking an 11.5% fall in June quarter GDP, Westpac senior economist Michael Gordon said.

"While the depth of the Q2 hit to the economy is of interest, what’s more crucial is how far the rebound extends," he said.

"Assuming no new Level 4 lockdown, we’re forecasting GDP to jump by around 8% in the September quarter and almost 4% in the December quarter. That would bring GDP to around 5% below its pre-Covid trend by the end of the year. However, that gap represents the loss of international travel and tourism due to border closures, so is likely to persist for some time."

In terms of the June quarter, Gordon said those sectors of the economy that fared best would have been those that were most able to operate under level 4, either due to being deemed ‘essential’ or being able to continue working from home. That includes agriculture, food manufacturing, finance, some professional services, and government.

"That said, some of them will still have taken a sizeable hit from the drop in domestic demand during the lockdown."

Government spending to contribute

Gordon said he expected a positive contribution to the outcome from government spending, "though this is highly uncertain".

"Bear in mind that this component only captures final demand from government – services such as education, health and law and order. Most of the Government support provided during the lockdown was in the form of transfers to households and businesses, the largest of which was the wage subsidy scheme. Consequently, the main impact on GDP was probably in the form of preventing an even bigger drop in consumer spending."

ASB economists are picking an 11% June quarter GDP fall, ASB senior economist Jane Turner said.

"There are limited policy implications from the Q2 GDP release, as the RBNZ and fiscal policy have already responded to the lockdown with a range of measures," she said.

"Going forward, further policy moves will be dictated by developments over the rest of the year and 2021.

"Like many others, we expect growth to rebound strongly, particularly over Q3. By Q4, we expect annual GDP growth to be down only 5% – although we see the risks now skewed to an even stronger H2 2020 recovery. Nonetheless, with unemployment rising and the borders to remain closed, we continue to believe the RBNZ’s 2021 GDP growth forecasts are on the optimistic side and expect the OCR to be cut to negative territory in April next year."