Liam Dann: GDP figures a bitter-sweet reminder of alternate economic reality

OPINION:

Today’s GDP data wasn’t just strong, it was incredibly strong.

At 2.8 per cent for the June quarter – and a 5.1 per cent average for the year – it offered a view of an economy stretched its limit by strong consumer demand.

Even the most optimistic economists could only push their forecasts to 1.7 per cent.

The Reserve Bank still had expectations of 0.7 per cent growth in place.

This was a snapshot of an economy with inflation pressure building, one where interest rates need to rise.

A potent mix of Government spending, strong export prices, consumer confidence and the short-lived transtasman travel bubble underpinned the strength.

Of course, the data only offers a view through the rear vision mirror.

It is a stark a reminder of two alternate economic realities of this pandemic in New Zealand.

For business that reminder will be bittersweet.

They must juggle extreme shifts of freedom and lockdown – boom and, for some, bust.

So perhaps it’s more like a view through the looking-glass.

The jarring shift from boom times to what is effectively the enforced recession of a lockdown will be too much for some to bear.

But the GDP data does at least provide some confidence that consumer demand will be there when they are finally allowed to trade again.

“Given that the economy was running hot going into the lockdown in August, the prospect of another V-shaped rebound becomes more likely,” said Westpac chief economist Michael Gordon.

“Once the risks of the current Covid outbreak clear, along with today’s result, this should bolster the RBNZ’s willingness to start raising the OCR.”

Markets, reacting to the GDP data, have increased the odds on the RBNZ hiking.

The two-year swap rate jumped by 7 basis point to 1.48 per cent on the back of the news.

Westpac senior market strategist Imre Speizer said current market pricing suggested that there was now a close to 50 per cent chance that the Reserve Bank would opt for a 50 basis point rate hike on October 6.

At the start of this week, the market was pricing in just a 5 per cent chance.

“It (the data) is old and it pre-dates the current Covid lockdown, but it is so much stronger than the market had expected,” he said.

“It adds to the Reserve Bank’s willingness to hike rates soon, and I guess that’s what the market is pricing in,” he said.

“Capacity pressures are a fact now. It’s not just a forecast or a guess.”

“At end of Q2, the economy was firming and was much stronger than we thought it was,” Speizer said.

Harbour Asset Management fixed income and currency strategist Hamish Pepper said market pricing was pointing to an OCR of 1.1 per cent by February next year.

“This data just gives them further comfort to get into their work come next month, and that they will have a lot to do before they pause for a breath.”

Looking out across the rest of the year economists see lockdown knocking GDP into negative territory before bouncing back.

Expectations range from a fall of 4 per cent to as much as 7 per cent for the third quarter.

“We are expecting a 7 per cent fall in Q3 as a result of lockdown, less than the upwardly revised 10 per cent fall experienced last lockdown,” said KiwiBank chief economist Jarrod Kerr.

“Level 4 for regions outside Auckland was shorter than last year and most activity is allowed to resume,” he said.

“Furthermore, businesses in general were ready and adapted to life in lockdown. And the Government was able to roll out policy that had been proven to work in previous lockdowns.”

Kerr is forecasting a rebound of 8.5 per cent in the fourth quarter.

“Demand is not destroyed, but deferred. The temporary hit to activity is unlikely to be enough to deter the RBNZ from removing some stimulus.”

Digging into today’s data, the 2.8 per cent rise was well up on the 1.4 per cent increase in the March quarter.

June 2021 quarter GDP was 4.3 per cent higher when compared with the December 2019 quarter, the quarter immediately before New Zealand’s first Covid-19 cases, StatsNZ noted.

The rise was led by the services industries.

Retail trade and accommodation was the largest contributor, driven by higher activity in accommodation and food services.

“Opening the transtasman travel bubble with Australia in the June 2021 quarter contributed to services industries with links to tourism, such as retail and accommodation, and transport,” said StatsNZ national accounts manager Paul Pascoe.

Business services also contributed to the growth, rising by 4.8 per cent due to higher activity in engineering, architectural and consulting services.

The primary and goods-producing industries also contributed to growth in the quarter, Pascoe said.

– Additional reporting Jamie Gray

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