March 21, 2023

Economic activity declined in late 2022; is this a sign of what is to come?

We take a look at the latest release of New Zealand’s Gross Domestic Product results.

Could New Zealand already be nearly six months deep into a recession?

Statistics New Zealand (StatsNZ) has officially released New Zealand’s Gross Domestic Product (GDP) result for the December 2022 quarter, revealing a 0.6 percent decline compared to the previous quarter. This followed a relatively strong September 2022 quarter, where the economy expanded by 1.7 percent. 

GDP is an important measure as it gives an indication of how an economy has performed. An economy is widely accepted to be in a recession following two consecutive quarters of a decline in GDP. Given that GDP results tend to be backwards looking, and the fact that we are almost at the end of the first quarter of 2023, it is highly likely that we are already knee-deep in a recession. And an engineered recession for that matter. The Reserve Bank of New Zealand (RBNZ) has openly and deliberately pushed to slow down consumption, and provoke a recession, in the on-going battle against rising prices. Initial forecasts, however, indicated that this recession would start in April 2023, not late 2022. 

It is also unknown at this point what the short- and long-term impacts of Cyclone Gabrielle will be, particularly on GDP. Natural disasters can have varying impacts on an economy at a regional and national level – a subject we explore in more detail in our latest Birds Eye View (BEV)

What has been the driver of our recent contraction in GDP? 

The recent decline in economic activity can be attributed to multiple causes. At the highest level, as presented below, economic activity in our primary, goods-producing, and service industries fell in the December 2022 quarter.

Source: Statistics New Zealand

Within the goods-producing industries the single largest contraction occurred in manufacturing, where GDP shrank by 1.9 percent. This corresponds to the fourth consecutive decline in economic activity within manufacturing. The drop in manufacturing GDP in the December 2022 quarter was partly offset by a boost in economic activity in construction, resulting in an overall decline in GDP of 0.3 percent in goods-producing industries. 

Meanwhile service industries, which had performed strongly in the previous two quarters leading up to December 2022, suffered only a minor 0.1 percent contraction. For primary industries, GDP decreased by 1.3 percent as a result of the 1.6 percent decline in agriculture, forestry, and fishing activity. The recent floods have had a severe impact on this industry in the upper North Island, which will not be reflected until the GDP releases for the first and second quarters of 2023. 

What lies ahead?

It is important to recognise the strength of the New Zealand economy heading into the December 2022 quarter. The economy had performed relatively well in the previous two quarters. And for the December 2022 quarter itself, some industries were still able to expand in the face of a broader economic downturn. However, as GDP is backwards looking, it therefore provides an indication of how an economy has performed, and not so much about how it will perform in the future. 

The impacts of Cyclone Gabrielle are unknown, and their full extent will not be known for some time. It may be that we see a short-term boost in economic activity through construction as the rebuild takes place. However, this could be outweighed by a broader decline in economic activity in other industries impacted. In particular in export driven industries, such as horticulture, which have seen entire crops destroyed for the season. In some cases it will take years for crops to be re-planted and return to pre-flood production. This will also have a material impact on prices, again particularly in horticulture related products, which have been a key contributor to inflation domestically. 

Regardless, this earlier than expected contraction in our economy is going to play a pivotal role in some key events on the horizon, such as further official cash rate (OCR) hikes and the general election in October. It also begs the question as to whether the length of our recession will be around one year, as initially expected, or perhaps even shorter or longer?