The bounce-back: Supporting economy means supporting our vulnerable

New Zealand’s much anticipated third-quarter GDP results saw an expected bounce back, but further growth depends on containing Covid-19 and continuing government support for vulnerable economies around the world

Our economy has roared to an expected 14 percent growth rate in the third quarter, mainly driven by fiscal stimulus and the lifting of virus-related restrictions.

It follows two consecutive negative growth quarters that saw New Zealand officially enter a recession.

While it will take time to go back to pre-pandemic levels of economic activity, if we continue to contain Covid-19 and apply strict border controls as we wait for vaccines to arrive, we can be cautiously optimistic about further growth.

A December snapshot: where are we at?

Industries that saw bigger falls in activity in the June quarter generally saw larger rebounds in the September 2020 quarter, with Statistics NZ reporting “the industries contributing the most to quarterly growth included retail trade and accommodation, up 42.8 percent; construction, up 52.4 percent; and manufacturing, up 17.2 per cent”.

According to Stats NZ December data, total manufacturing sales volumes rose to $25 billion, up 3.1 percent ($743 million) on the September 2019 quarter. Total wholesale trade sales rose to $29.8 billion, up $1.6 billion (5.8 percent) on September last year.

This reflected a sharp rebound from low levels in the June quarter, when most businesses shut temporarily during the COVID-19 lockdown.

---

What will it take to say New Zealand’s economy is out of the woods? Click here to comment.

---

On an annual basis, the current account deficit for the September 2020 year narrowed to $2.6 billion, compared with a deficit of $11.7 billion in the September 2019 year.

The Government has extended its Business Finance Guarantee Scheme until 30 June 2021 to help with business cash flow needs including response or recovery projects resulting from Covid-19.

Yesterday Treasury released its latest economic and fiscal forecasts in the 2020 Half Year Economic and Fiscal Update.

Its working assumption is that Alert Level 1 restrictions will be in place until the end of 2021, and the unemployment rate is forecast to peak at 6.9 percent by the end of 2021.

Border restrictions should ease from July 2021, and will hopefully be removed by January 2022.

Remembering the first half of 2020

GDP fell by 1.2 percent in the March quarter (the first time it recorded negative quarterly growth rate since the last quarter of 2010).

The second quarter was worse than the first, as New Zealand started the quarter in alert level 4 lockdown, with strict restrictions

GDP contracted a seasonally adjusted 11 percent quarter-on-quarter in the June quarter of 2020, its sharpest quarterly contraction on record.

That was a historical moment, because the last time New Zealand had recorded two consecutive negative quarters for GDP was the third and fourth quarters of 2010.

Household spending also declined 12.1 percent in June 2020 quarter.

Governments across the globe imposed strict lockdowns to slow the spread of Covid-19.

These measures triggered the most severe economic collapse since the Great Depression. All of the OECD countries reported significant negative growth rates in the second quarter of 2020, and many major economies posted double digit contractions.

An incomplete rebound

Many economies around the world have rebounded in the third quarter, driven by pent-up consumer demand and government support.

The UK, for example, rebounded by 15.5 percent, following a contraction of 19.8 per cent in the second quarter.

GDP in the US rebounded by 7.4 in the third quarter, following a contraction of 9 percent in the second quarter.

This is a substantial rebound of GDP, however, it is incomplete. As you can see below, GDP levels both in the UK and the US remain below pre-pandemic levels.

Real GDP indices (2019:Q4=100) 

In the case of New Zealand, this is seen in the 2.2 percent decline in GDP over the year to September 2020, which is the largest annual decline recorded in the GDP series.

A long and difficult ascent

According to the International Monetary Fund’s World Economic Outlook Update for October, the global economy is projected to shrink by 4.4 percent this year due to Covid-19. Global growth is projected at 5.2 per cent in 2021.

The New Zealand economy is projected to contract by 6.1 percent this year, but it is likely to bounce back with 4.4 percent growth rate in 2021.

Again, these are just forecasts based on the current state of the globe. We should not forget that these projections are likely to change due to a still high degree of uncertainty in the global markets.

Several Covid-19 vaccines are now being applied, and the success rate of these through the most advanced countries of the northern hemisphere winter will be a key determinant for the revisions of the global economy projections.

Two new vaccines secured, enough for every New Zealander

New Zealand has been managing the border to stop the spread of the virus. Stringent border controls and mandatory quarantine helped New Zealand to remain free of Covid-19. We have no community transmission. All the cases are in managed isolation. These are all good signals for the economic activity.

Many Kiwis, who might otherwise have taken overseas holidays, are booking domestic summer vacations. Having said that, we can’t get complacent about Covid-19 over summer. Not all countries are as lucky as us here in New Zealand. Some countries, such as Germany, the Netherlands, and the Czech Republic, are imposing new lockdowns when they experience a sudden spike in infections.

This week the Government revealed its plan to manage Covid-19 in case it gets into the community over summer.

There can be optimism for 2021, with continued, concerted effort to contain the virus and keep economies – including the most vulnerable within them – supported.