Another Contraction In Economic Activity. It's Turbulence.

• Following on from the massive 14% rebound in the September quarter, economic growth contracted again in the final quarter of 2020, falling 1%. We’re likely to see another slight contraction in the first quarter of 2021. The slight technical recession is more like turbulence after a massive disruption earlier in 2020. Imagine a plane that has completed a stalled nosedive recovery manoeuvre. After nosediving in the second quarter, the plane pulled up sharply in the third, and is now hitting a bit of turbulence. Three of the plane’s four engines are humming. It’s the fourth engine that exports services, such as tourism and education, that remains without power.
• The fall in construction over the quarter was much deeper than expected. Most of the pullback in construction can be attributed as a ‘payback’ of sorts from the spike in the third quarter. Commerical construction was particularly weak, although residential construction was up over the quarter. Retail trade and accommodation recorded a drop in activity, related to the lack of international tourism normally abundant this time of year. International tourists are conspicuously absent, and their absence will be felt to a greater extent in the first quarter.
• Agriculture was also soft, and net exports suffered from soft exports and a strong lift in imports. Household spending was softer than we anticipated over the quarter. The strength of the housing market may be having a lesser impact on spending, and the scarring from the Covid crisis may be a little deeper.
• It’s important to look forward. Vaccine rollouts and talks of a travel bubble with Australia (and hopefully more countries into next year) should support solid growth into 2022.

According to StatsNZ “Activity in the December quarter shows a mixed picture – some industries are down, but others have held up or risen, despite the ongoing impact of COVID.”

The December quarter is well behind us. And we’re already in the third trimester of the first quarter of 2021. We’re feeling the full impact of the border closures on tourism and education now. We expect to see another slight contraction in economic activity over the first quarter of 2021. In any given year, Q1 is traditionally peak international tourism season. International tourists lap up the Kiwi summer and international students arrive before the semester begins. The Q4 report foreshadows the damage caused by the border restrictions. Indeed, we are yet to feel the full wrath of the closed borders. And on top of this, the March quarter also captured the two Level 3 lockdowns Auckland faced in February. Although we’ve learned to live and work through various alert levels, economic activity is restricted when social distancing measures are tightened. Timely Kiwibank spend data show how disruptive the lockdown was on Auckland’s economic activity, particularly within the service industry. Given the ongoing border restrictions and the ‘snap’ lockdowns, we’re picking another contraction over the March quarter.

Near-term bumps however are expected. Continued absence of foreign visitors means industries reliant on our service exports – tourism and education – will continue to struggle. And until we achieve widespread vaccination, lockdowns will be part of the game plan to manage covid. On the other hand, the rampant housing market should fuel momentum in the construction sector. The industry’s December quarter performance should not be read as a set-back, but rather payback for their outperformance in the September quarter.

Overall, we’re hoping to see travel bubbles emerge, although we’re not expecting our drawbridge to be let down completely until 2022, at the earliest. The stark unevenness in the recovery at the industry level will likely continue in the quarters to follow. We are expecting growth to be modest over 2021. And despite the rebound we’re forecasting over this year, economic activity is not expected to surpass the pre-covid peak until early 2022.

Nonetheless, there’s light at the end of the tunnel. NZ’s vaccination programme is underway, with the general population set to be inoculated from July. And barring another lockdown which would rival the Great Lockdown of 2020, the Kiwi economy is now on a recovery trajectory. Neither the December nor March quarter GDP report cards are likely to add or erase brushstrokes from the big picture.

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