A September Spring Fling. Double-digit Growth Won’t Be Repeated

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.