A recession avoided, for now

The latest figures from Statistics New Zealand show that GDP fell by 0.2 percent in the first quarter of 2022; a bigger drop than expected. GDP per capita also fell by 0.2 percent, in line with headline GDP. In the first quarter of the year, Omicron was rampant in the community and daily COVID-19 cases were on the rise. This led to worker absenteeism and many people self-isolating. On top of this, inflation had begun to pick up speed, and the effects of the war in Ukraine had started to reverberate across the globe.

Statistics New Zealand measures GDP in two ways: the production approach and the expenditure approach. The production approach measures the total value of goods and services produced, by all industries; and the expenditure approach measures the final purchases of goods and services produced in New Zealand. The components within each of these measures can provide distinct insights into what is happening in the economy. 

Primary industries experienced the biggest dip in growth (-1.2 percent) over the quarter, driven largely by a nine percent fall in the mining industry. GDP in the goods-producing (-0.1 percent) and service (zero percent) industries was virtually unchanged. In taking a closer look at the sub-industries, construction (1.7 percent), education and training (5.4 percent), and wholesale trade (1.5 percent) had the highest rates of quarterly growth. Construction activity bounced back in the first quarter, and consents issued suggest a healthy pipeline of work. However, materials shortages, cost pressures and rising interest rates will, almost certainly, hold back building activity moving forward. Education and training experienced a big bounce back as schools and early childhood centres reopened. 

On the flip side, the transport, postal and warehousing (-2.7 percent), retail trade and accommodation (-1.9 percent), and manufacturing (-1.4 percent) industries took the biggest hits. A surge of Omicron cases led to people restricting their own activity, and spending, in retail settings. Worker absenteeism and poor primary sector production contributed to weaker manufacturing output. 

Total expenditure on GDP fell by 0.1 percent. Household consumption was a bright spot, growing by 4.6 percent over the quarter. This is not entirely surprising considering the loosening of restrictions and the inability of people to spend overseas. The biggest jump was in spending on services (5.8 percent). 

The weakest link in this set of data was export performance. Total exports were down 14.3 percent over the quarter. Service exports, which include travel and insurance services, continue to be plagued by the effects of the border closure, falling by nearly 25 percent over the quarter. Goods exports fell by 6.2 percent. Shipping woes and input and labour constraints in the manufacturing and primary sector have all contributed to this, along with soft global economic conditions. By comparison, total imports fell by 2.8 percent.

It is clear that Omicron-related factors have resulted in this mixed-bag of a performance, reflecting a volatile environment. And the future state of the economy is getting harder to decipher amongst all the noise. The uneven impact of lockdowns and other restrictions on different sectors has meant that industries are recovering (or not, in some cases) at their own unique pace and time.

What complicates the matter more is that GDP numbers, in isolation, do not provide a complete picture. They are just one piece of the puzzle. While it’s true that output and consumer and business confidence is low, the labour market is extremely tight. The unemployment rate currently stands at a historical low of 3.2 percent. 

It is important to remember that the GDP statistics are backward-looking and are released with a significant lag. In the incredibly fast-changing and unpredictable COVID-19 era, more timely indicators, such as surveys and spending data, can point to a more accurate picture of the current state of the economy. 

In the three months since the March 2022 quarter, daily COVID-19 cases have been falling, although worker absenteeism and self-isolation are not out of the picture yet. On the downside, the war in Ukraine has intensified over the past few months, and the pressure on global commodity prices has increased, as has uncertainty. 

Beginning in April, the Performance of Services Index (PSI) sprung back into expansionary territory, a sign of gradual improvement. In the first quarter, the PSI consistently indicated a contraction. The Performance of Manufacturing Index (PMI) has been expanding every month in the 2022 year. However, the pace of expansion was beginning to taper off in April. The latest data on consumer spending from the Ministry of Business, Innovation and Employment (MBIE) indicates that consumer spending has remained mostly static over the past three months. Stronger demand for our exports, as a result of global food shortages and supply constraints, may support growth over the short- to medium-term, particularly as global economic activity picks up. 

All factors considered, we do not expect GDP to drop again in the second quarter of this year. A rebound in services and exports, along with net migration inching upwards, will provide support.
 

It is hard to overstate just how uncertain the longer-term outlook is at the moment. In saying that, the scales look to be tipping towards a slowdown. Increasingly tight monetary policy and high inflation are dampening demand, which will likely encourage consumers to tighten their belts. Consumer and business confidence continue to deteriorate, reflecting the uncertain economic climate. Businesses are still battling with labour and input shortages. Net migration has also continued to stay in the red. The border reopening will provide some respite, but this is only likely to have an effect at the end of the year when tourism, and other service exports, pick up. 

In the past, economic downturns have been accompanied by rising unemployment and a shortage of jobs. This textbook scenario is not happening at the moment. While some parts of the economy do seem to be struggling, much of the slowdown is a result of supply-side constraints. As pent-up demand subsides, and supply-side pressures begin to deflate, we can expect growth to pick up again slowly, barring any other unexpected shocks. Other factors such as the return of international tourism, and COVID-19-related measures gradually being eased in China, our main trading partner, will also support growth. All of these factors, taken together, point to a slow improvement in economic conditions, as opposed to a strong bounce back. The OECD expects GDP to increase by just three percent in 2022, and two percent in 2023, as international factors continue to drag down growth.

Most of the challenges that New Zealand is grappling with are also being experienced by other advanced nations. The war in Europe has, directly, and indirectly, changed the course of economic growth for many of our key trading partners. The United States and Japan also experienced slight dips in GDP in the first quarter of the year. Australia was largely shielded thanks to strong demand for its exports, and buoyant domestic consumption. More information about how our trading partners are doing, and an in-depth analysis of the different sectors of the economy, can be found in the latest edition of the Birds Eye View.