Recession over, recovery incomplete

The September 2020 gross domestic product (GDP) results released today by Statistics New Zealand show a strong initial recovery from COVID-19 lockdowns. New Zealand’s gross domestic product grew 14 percent in the September 2020 quarter. This is the strongest quarterly growth in GDP on record in New Zealand.

This follows the largest quarterly decline recorded in June 2020, 11 percent, during which there was the national lockdowns at alert level four when non-essential businesses closed and travel was heavily restricted and further restrictions on economic activities and travel at lower alert levels.

Total GDP was up 0.4 percent compared with the September 2019 quarter, indicating that for the September 2020 quarter at least, New Zealand has managed to return to a pre-COVID level of activity.

The impacts of COVID-19 continued to show in GDP for the year to September 2020. Annual GDP is down 2.2 percent compared to the 12 months prior. This fall from September 2019 is the largest annual decline recorded in the GDP series.

As expected in BERL’s Autumn Birds Eye View, the recession that occurred in the March and June quarters, when GDP fell by 1.4 percent and 11 percent respectively, is officially over. This was always likely given the impact the lockdowns and subsequent restrictions on allowed activities and movement had on economic activity. By effectively eliminating COVID-19, the domestic economy, with the exception of international tourism, has been able to bounce back quickly and strongly.

However, while this news in undoubtedly positive it does not mean that New Zealand is back on track or that the economy has escaped the worst impacts of COVID-19. The long period of lockdown caused a number of people to reduce spending in the June quarter. This spending that was suppressed during the lockdown will likely have shifted into the September quarter.

The suppressed demand that occurred during the lockdown was released when alert levels were reduced. The industries that saw bigger falls in activity in the June quarter generally saw large rebounds in the September 2020 quarter. After falling by 9.8 percent in the June 2020 quarter, service industries rose 11.1 percent. Meanwhile, goods-producing industries grew 26 percent after falling 15.9 percent in June 2020.

As people ventured outside their bubbles and local areas, they spent more on household goods, cars, and food. The industries contributing the most to quarterly growth included retail trade and accommodation which was up 42.8 percent and manufacturing, up 17.2 percent.

Even though activity across the country largely returned to pre-COVID-19 levels, this has not been consistent across the economy. Although transport, postal, and warehousing rose 16 percent, after falling 39 percent in June, the impact of reduced international and domestic air travel has seen the industry remain 19.3 percent down on the level of activity in the year in the year to September 2019.

Despite these strong initial results, the recovery should be viewed with caution. The Treasury Half Year Economic and Fiscal Update (HYEFU) forecasts annual GDP for the year to June 2021 to be 2.1 percent less than for the year to June 2020. Treasury then expects GDP to grow 1.5 percent in same period to June 2022. This is down compared to 2.8 percent GDP growth in 2019.

The economy has been supported by government schemes intended to support businesses and employees through what continues to be a difficult period. As these support measures come to an end, the true impact of COVID-19 will fully emerge as businesses are be forced to make difficult decisions with flow on impacts for households.

The September 2020 quarter saw the unemployment rate rise from 4.0 percent to 5.3 percent. Longer term the Treasury forecasts in the HYEFU expect unemployment to grow to 6.6 percent by June 2021 and peak at 6.8 percent in July 2022. Unemployment is only expected to return to pre COVID-19 levels (June 2020) by June 2025.

While the recovery is off to a strong start the longer term impact of COVID-19 on the New Zealand remains to be seen. Businesses and households are still likely to face difficult economic times ahead for a while to come. The next two quarters, December 2020 and March 2021 will provide a much clearer picture of the state of the post COVID-19 economy.