Ok it’s over now, move on.
- The Kiwi economy recorded a whopping -12.2% decline – close to our estimate of -12.5%. Services, particularly face-to-face, recorded huge declines.
- The report was expectedly weak. There were few surprises to be fair. You lock up the economy, activity falls. The focus must now turn to the recovery. And the current quarter looks pretty good. It’s the path we take over the next three years that needs attention.
- More targeted policy is still required from the Government and RBNZ to fuel the recovery.
As economists, we love trawling through data. And we’ve never seen anything like this. It was traumatic. The economy contracted by a gigantic 12.2% in the June quarter, not far off our pick. The next largest fall was recorded back in the early 1990s and was a paltry -2.4% by comparison. On an annual basis activity fell by 12.4%yoy. Never have we recorded such declines. And never have we bounced back so quickly, either.
Nationwide lockdowns and social distancing measures meant industries reliant on foreign visitors and face-to-face contact were particularly hit hard. Service exports (including tourism) were stonewalled, and down 40%qoq. Other service sector industries such as retail, accommodation and hospitality (-25.2%qoq) recorded big falls in revenue. The lockdowns confined most of us to our hometowns, so transport (especially airline), fell hard. Construction, which contracted 26%qoq, led the goods producing industries lower. Consumption was down 12%, and investment was slashed by 20%.
Essential services obviously held up far better during the lockdowns, and recorded more modest declines. Primary production experienced a smallest decline, with agriculture only 0.4% lower in the quarter. Food is a necessity, and it’s much easier to social distance down on the farm.
We were a little surprised by the weakness in imports, with fuel down more than we expected – hence the slight upside from our estimate of 12.5% and the actual print of 12.2%.
It’s easy to get too caught up in the magnitude of today’s figures. Yes, NZ is now officially in recession with two consecutive quarters of contraction. But today’s data refers to the second quarter, and we are almost into the fourth. We are picking a decent rebound in the third quarter of around 10%qoq as social distancing measures were rolled back. The Auckland level-three lockdown over August will certainly take some of the shine in the rebound. And the economy won’t have recovered all lost production in the third quarter while our borders remain closed.
Service outage as lockdown required social distancing
All main industry groups recorded sharp falls in the quarter. But service sector firms were among the worst hit. particularly those reliant on foreign visitor arrivals and face-to-face contact with customers. Retail, accommodation and restaurant services contracted 25% in the quarter. Hotels and restaurants were closed during lockdown and suffered even as NZ lowered alert-levels during the quarter. There just wasn’t as many digital substitutes for face-to-face services compared to say retail. Transport services were another industry that received a heavy blow (-38.7%) from the covid lockdown. Travel was highly restricted; we were largely confined to home.
Goods producing output was weighed down heavily by a 26% fall in construction activity. Building sites were no-go areas while NZ was in full lockdown. Meanwhile, primary production was hit the least by the pandemic (down 8.7%qoq). Mining activity did decline over two fifths in the quarter. Food production in contrast, an essential part of the economy, largely continued as normal. Agriculture itself recorded a comparatively tiny 0.4% dip. It’s much easier to social distance from people in the country, and export markets remain opened to out produce.
High frequency spend is strong
Expenditure GDP further contracted in the June quarter by a massive 9.8%. Household spending, in particular, fell 12.1%qoq, the deepest decline on record. But we’re not surprised. Our proprietary transactional data had foreshadowed today’s report (see here). With stay-at-home orders issued, households spent less on recreation and cultural activities, as well as domestic air passenger services. And boarded store fronts meant less restaurant meals and more home-cooked meals. Spending on non-durable goods declined 11.1%qoq, with lower spending on petrol leading the descent. And spending on durable goods fell 14.1%qoq, mainly due to fewer motor vehicle purchases. With heightened uncertainty, there’s an understandable reluctance to go out and spend big. Job security is still front of mind for many Kiwis. While spending on non-durables is starting to recover, spending on investment goods will likely remain subdued for some time.
The impact of our border restrictions is beginning to show in the data. Imports and exports of services respectively fell 33%qoq and 40%qoq, driven by sharp falls in travel and transport services. Given that the borders restrictions will remain in place in the near-term, we can expect the descent in spending to continue. But propping up the contribution of net exports to expenditure GDP was a much greater than expected drop in goods imports of 21.2%. That compared to a more modest 7% fall in the exports of goods. Imports are subtracted from GDP, so a larger fall in imports is a positive for GDP.
No point dwelling on the past
There is little point getting hung up on Q2 numbers. There is likely to be major revisions to the numbers by StatsNZ as new information comes to hand. Also, the biggest decline in activity on record will probably be followed up by the largest quarterly jump. We are almost in the December quarter. The rebound in activity in Q3 is likely to have been softened by Auckland’s level 3 lockdown, but we are still picking a 10%qoq jump. Because the economy was more operational during the August lockdown. Level 3 allowed for more economic activity to take place than under a complete lockdown. Businesses and households have clearly adapted to trading in a world with limited face-to-face contract. Many re-jigged their business models to accommodate the renewed restrictions on gatherings and the shift to digital. And activity that was halted during the lockdown, particularly across traditional services, was not necessarily cancelled activity but rather deferred. Kiwibank electronic transactional data show that spending in these areas has resumed since moving down the alert levels. It’s developments like these that support a strong third-quarter rebound in economic activity.
Time to pivot to the future
The unprecedented nature of the economic shock means we face a unique recovery, full of opportunities. A key opportunity dished up by Covid-19 is a weapon in the fight against climate change. Many Kiwis were forced to work from home, and many preferred it. The lockdowns provided proof of concept. A decent chunk of the Kiwi workforce can work successfully from home. Thereby reducing the need for the daily commute. A shallower peak in transport takes some pressure off clogged transport infrastructure and reduces carbon pollution. The need to re-engineer parts of our economy is also throwing up opportunities to tackle climate related issues. The Government has the ability to fast track progress in environmental areas, with access to ample funding at very low, even negative interest rates. We have our ‘once in a generation’ chance to right the wrongs of the past.
A shift to working from home will change the nature of many places of work. If a large share of the workforce continues to work from home, office space in our largest centres will be freed up, helping to boost productivity. Businesses may find more resources to invest in the next opportunity. On the flipside however, the commercial property sector will likely face the challenge of reduced demand. And many businesses dependent on CBD workers for their coffee fix, and other retail habits, may struggle.
Many industries may grab onto opportunities made available by disruptions to global supply chains. The inevitable reallocation of resources towards more productive firms and processes will have benefits. The faster adoption of productivity enhancing technologies such as AI and automation seem obvious.
Policy measures should now focus on enabling businesses to adapt. The wage subsidies were the best policy response during “triage”. We now in a rehabilitation phase. Policies aimed at SME businesses are important. SME grants may be a cost effective way to support affected businesses and encourage new businesses. SME grants would enable affected businesses to pivot online, or evolve for a new client base. Ultimately, we need to redirect disrupted employees into new employment opportunities. Lost retailing jobs could be redirected into new and exciting roles in protecting the environment, education or revamping health. SME grants could be targeted at lowering the cost of hiring additional workers.
More needs to be done. The reason interest rates are falling, and will likely go negative (for wholesale rates), is because the RBNZ believes there is not enough stimulus in the economy to return us to full employment. If we had done too much, interest rates would be rising. The fact we haven’t done enough, means interest rates will keep falling. It’s that simple.