Smaller slide, bigger bounce
- The Kiwi economy bounced back with a vengeance, recording a masssive 14% rebound in Q3, following the 11% contraction in Q2. This is as close as you get to a true V-shaped recovery.
- Output in all main industry groups rose over the quarter, led by construction and retail trade. But we haven’t recouped all activity lost over lockdown. We’re still down 2.2% on an annual basis.
- Around 95% of our economy is performing particularly well. But we must spare a thought for the other 5%. The true test of the tourism and education sectors is right now, over the peak summer season. And there’s a risk we see activity decline over the Q4, and/or Q1 2021.
NZ’s economy bounced back with a vengeance in the third quarter. The GDP report card showed a massive 14% bounce in Q3 (close to our estimate of 13.5%), following the 11% contraction in Q2. This is as close as you get to a true V-shaped recovery. The Q3 was a touch stronger than expected, and off a slightly higher 2Q base. The Q2 contraction was revised up from 12% to 11%. Basically, a smaller slide and a bigger bounce back. We were not expecting that! All industries recorded large increases in activity as we came out of lockdown. And our economy is tracking nicely, all things considered. GDP fell 2.2% over the year to September. Sure, that’s the largest annual decline ever recorded. But we’d take that with a smile. Especially when you consider the 5-7% declines originally forecast.
The Kiwi economy’s post-lockdown performance was much better than we initially thought. And the record rise is despite the resurgence of covid in Auckland which saw restrictions tighten in our largest city. The quarterly numbers are hard to digest. Lifting the lockdown saw all industries record growth in activity. Construction led the pack with a 52.4% pick-up in activity, as machines were restarted and the high-vis vests donned once again. Manufacturing too was strong, up 17.2%. The services industries outperformed recording 11% of output growth. The retail, trade and accommodation category was the main driver, with a 42.8% rise. A release of pent-up demand saw consumption increase 14.8% over the quarter with households eating out and spending up large on cars and home equipment. Investment spending too rose sharply by 27.1%, driven mainly by growth in residential building.
The technical recession is over, but technically, we’ve engineered the past two quarters. You lock-up the economy, activity falls. You re-open the economy, activity rises. What has surprised us is the strength of activity now nine months since the end of the lockdown. High frequency indicators suggest that December will be a decent quarter. We’ve underestimated the adaptability of Kiwi business.
Nonetheless, the September quarter’s double-digit growth rate is nothing more than a spring fling. Quarterly growth of such magnitude will unlikely be repeated. Beyond Dec-20, growth is expected to be more subdued, because of ongoing border restrictions and rising unemployment.
Boy, what a bounce back
All main industry groups grew in the September quarter. What’s clear from the report is that any activity halted during the lockdown, was not necessarily cancelled but rather deferred.
The service sector was the leading contributor to the rise in overall GDP. Retail trade was up 24.8% and accommodation and food services a whopping 107.4% in a single quarter! But on an annual basis, the impact of the lockdown is striking. Retail, accommodation and restaurants declined 2.6% over the year to September 2020. Transport services also bounced back but is down 19.3%yoy. The impact of the fall in domestic travel during the lockdown on these services lingers. And they’re still having to cope with the ongoing border closures.
Construction and manufacturing drove the rise among goods-producing industries. Construction, in particular, contributed a whole 2.9%pts to overall GDP growth. Activity was booming in construction services and residential construction once the restrictions eased. Primary industries on the other hand recorded more subdued growth compared to the rest of the economy. But then primary production didn’t experience such a larger hit in Q2. Sub-industries forestry and logging, and mining however recorded double-digit growth. Because unlike agriculture, these industries were on standby during the lockdown.
Looking ahead, we are likely to see a growing divergence between industries, wedged by the ongoing border restrictions. Those reliant on foreign tourism such as transport and service-related industries (accommodation & food services; arts, recreation & culture) will continue to do it tough. But industries like construction are well supported by strong domestic demand for housing as well as the Government’s infrastructure plans.
September spending splurge
The covid elimination strategy combined with income support measures to fight the economic fallout led to a splurge in spending over the September quarter. Expenditure GDP rebounded an astronomical 15.7% (1%pt above our bullish forecast of 14.7%) following a 9.5% decline in Q2. On an annual basis, expenditure GDP was almost 4% higher than Q4 last year, but over the September year as a whole GDP was 0.8% down – we haven’t completely recovered. Consumers splurged out of lockdown. Private consumption rebounded 14.8%. Consumers spent up large on goods over the quarter. Plenty was spent on durables, as unused overseas travel budgets look to have been redirected to buying cars and fitting out the pad. Spending on services also rebounded, just not as aggressively as goods. Nevertheless, Kiwi took advantage of generally low covid alert levels over the quarter, we enjoyed the luxury of dinning out and travelling around NZ. The growth seen in third quarter spending can’t be sustained and will slow in the quarters ahead.
Investment activity rebounded too, propelled by a solid quarter of house building. Business investment also made up some lost ground of the June quarter. However, non-construction investment activity was 6.2% lower than the last September year, illustrating the cautious behaviour of firms to invest since coming leaving lockdown. Cautious behaviour is understandable, but a lack of business investment does pose a downside risk to the recovery over 2021 and beyond.
Both exports and imports fired back up in the third quarter. The increased appetite among Kiwi to spend had to be met from somewhere and contributed to a 16.2% jump in goods imports. Our goods exports did well too, helped by the ongoing recovery in major trading partners such as China over the period. Demand for our primary exports has held up surprisingly well given the damage covid has done to economies around the world. Forestry for instance has had a complete reversal of fortune over 2020.
Onwards and upwards?
The economy has certainly proven to be more robust than we initially assumed. But it’s indeed questionable whether this level of activity can continue. For starters, this summer will be challenging for the 5% of our economy reliant on foreign tourism. Domestic tourism will pick up some of the slack from over the holiday season but won’t come close to filling the void left by missing international tourists. Some forward indicators, such as the BusinessNZ Performance of Services Index (PSI), are providing tentative clues about the tough summer months ahead. Remembering the service sector will be hit hardest by a closed border (see chart below). In addition, current bottle necks at our major ports are providing supply-side issues for areas such as the retail sector.
We are expecting more modest growth over 2021, precisely because of the ongoing border restrictions and rising unemployment. And despite the 3.5% rebound we’re forecasting over next year, economic activity is not expected to surpass the pre-covid peak until early 2022. The RBNZ holds a similar view. At Number 2 the Terrace, they’re forecasting GDP to bounce around in the near-term, between negative and positive territory.
We’ve felt the impact of the lockdown. We are yet to feel the full wrath of our closed borders.
Indeed, the outlook for 2021 and beyond hinges a lot on our assumptions around the border restrictions. We’re not expecting a full reopening until 2022. And that’s the general consensus. Next year’s coivd vaccination programme is great news, but supply of the vaccine may be an issue with the whole world needing a jab. There’s a hesitation to reopen given that covid cases continue to climb at a scary pace outside our walls.
But creaking the door open with travel bubbles like the NZ-Aus one proposed, provides an upside risk to those assumptions. Indeed, the earlier we can allow international mobility, the better that is for the 5%, and ultimately, the quicker the recovery will be.