In the end almost everyone got their GDP forecasts wrong for the December quarter, but then most economists had admitted they expected to be surprised – either way.

The final number was certainly more bleak than forecasters had been expecting with the economy shrinking 1 percent in the December quarter. Seven out of 16 industries contracted in size, with construction, retail trade and accommodation being the largest decliners.

Paul Pascoe, national accounts manager at Statistics NZ, said rising residential building activity had partly offset those falls and construction remained at historically high levels.

“The December quarter is traditionally the beginning of the peak international tourism season and the absence of visitors due to the Covid-19 pandemic had impacted the final result.”

It’s likely this will flow into the March quarter result as well.

Kiwibank economist Jarrod Kerr said 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. Commercial construction was particularly weak, although residential construction was up over the quarter.”

GDP in calendar year 2020 fell 2.9 percent, largely because of the nationwide Level 4 lockdown through much of the June quarter.

December quarter GDP was also down 0.9 percent from the same quarter in 2019.

Looking ahead, Kerr said he was expecting a further contraction in the March quarter, mainly due to the borders remaining closed and the impact of two Level 3 lockdowns in Auckland.

“While a second quarterly contraction would confirm a technical recession and unemployment may lift a little as a result, any recorded fall in the March quarter is now likely to be lower following the unexpected large decline in the December quarter.”

Barring another prolonged lockdown, Kerr said the NZ economy is now on a firm recovery path.

On a comparative basis, NZ fared much better in the December quarter, with its 0.9 percent contraction, than some of our major trading partners.

Comparing the most recent December quarter to the same period in 2019, Australia’s economy was 1.1 percent weaker, the US was down 2.4 percent, while Britain’s economy contracted 7.8 percent according to OECD figures.

Trans-Tasman bubble getting close, but government remains coy on start date

Tourism businesses will be counting the days until the long awaited Trans-Tasman bubble comes into effect.

Nearly a year since it was first mooted and after a couple of false starts, it looks like the planned reunion of the two countries could be imminent, though the Government is remaining tight lipped on the plans and wouldn’t be drawn on a firm starting date.

The Government is working “very, very hard” on the trans-Tasman bubble, which it hopes will be possible “soon” was as far as Prime Minister Jacinda Ardern was prepared to go at a media briefing yesterday, adding she didn’t want to talk dates yet “because I don’t want to be moving goalposts”.

However, Ardern did point out the proposed travel bubble wouldn’t be completely risk-free noting that travellers making use of it from both countries faced the possibility of being stranded if a community outbreak of Covid-19 caused a lockdown in either NZ or Australia.

The Government is also coming under increasing political pressure regarding the trans-Tasman bubble with ACT leader David Seymour saying NZ is five months behind Australia, which opened its one-way to NZ in late October.

NZ sharemarket goes back into reverse after recent gains

After recent gains, investors might be left feeling wrong-footed after the NZ sharemarket closed sharply lower yesterday, with the NZX50 finishing down 1 percent and closing at its low for the day at 12,496.

A fall of 69 points or more today would all but wipe out this week’s gains completely.

Overnight the 10-year US Treasury yield spiked above 1.73 percent following the US Federal Reserve’s latest monetary policy statement (more below) putting further pressure on global equity markets.

As a result, interest rate-sensitive energy stocks again led yesterday’s sell-off. Meridian Energy fell 4.7 percent to $5.46, Genesis Energy weakened 4 percent to $3.60, and Mercury NZ declined 2.8 percent to $6.25.

A2 Milk shares continued their downward slide ending the day at a new three-year low of $9.10 and now look increasingly likely to fall below $9.00 for the first time since February 2018.

On the flip side, travel stocks were boosted by media reports that the border with Australia and the Pacific Islands is likely to reopen next month. That saw Auckland Airport shares gain 2.1 percent to $7.76 while Tourism Holdings continued its recent strong run, lifting a further 4 percent to $2.60.

US Federal Reserve revises up its economic growth forecast, has no plans to hike rates prematurely

The US Federal Reserve chairman Jerome Powell might have felt a bit like Goldilocks yesterday trying to calibrate his messaging to ensure it was neither too hot nor too cold, but just right.

Sharply ramping up expectations for economic growth to 6.5 percent from 4.2 percent in December, Powell reiterated there are no interest rate hikes likely through 2023, despite the improving outlook and the possibility of higher inflation.

As was widely expected, the policymaking Federal Open Market Committee also voted to keep short-term borrowing rates steady near zero, while continuing an asset purchase program in which the central bank buys at least US$120 billion of bonds a month.

The key changes came in how central bankers view the economic road ahead and what impact that could have on policy.

After opening weaker, US equity markets reacted positively to the news with the S&P500 index gaining 0.3 percent to close at 3974 on Wednesday (US time), a new record high.

With the increase in GDP, committee members forecast unemployment to fall to 4.5 percent from its current 6.2 percent level. That compares with a 5 percent estimate in December.

Expectations for core inflation moved higher, with the committee now expecting a 2.2 percent gain this year as measured by personal consumption expenditures.

Powell had previously said he will run the US economy “hot” meaning he will look through any inflationary outcomes in order to further reduce unemployment.

The bond market remains unconvinced about the Fed’s forecasts believing it will need to act sooner than it expects to hike interest rates. That saw the 10-year US Treasury yield spike 8 basis points to 1.73 percent last night, its highest level in 14 months.

Volkswagen once again making a splash and has Tesla in its sights

Volkswagen has become Europe’s new ‘hot’ stock having swiftly moved from corporate dinosaur to market darling, and its chief executive officer’s imitation of Elon Musk has a lot to do with it.

They say imitation is the sincerest form of flattery and CEO Herbert Diess has clearly been studying his Tesla rival. From captivating investors big and small and taking a hands-on role in getting VW’s message out on social media through to staging splashy events big on ambition, Diess has put the shine back into VW.

And so far the strategy appears to be paying dividends, with the carmaker’s common shares now up almost 70 percent this year – while the more liquid preference shares have gained more than 40 percent.

The turnabout in sentiment has been both dramatic and sudden. VW’s market capitalisation fell last year as Tesla vaulted past all other automakers to become the world’s most valuable by a wide margin. But already this month, VW has added about €36 billion euros (NZ$77.5 billion) to its valuation, as optimism that it may be able to catch up to Tesla squeezes short sellers.

The amount of market value VW has added in March is well over half the total capitalisation of Diess’s former employer, BMW, which set a goal on Wednesday for roughly half of total sales to be all-electric by the end of the decade.

VW’s stock started its ascent when UBS Group analysts issued a bullish set of reports on its findings from tearing apart VW’s first mass-market model built off a dedicated EV platform, the ID.3 hatchback, describing the car as “the most credible EV effort by any legacy auto company so far.”

Andrew Patterson is Newsroom's Markets Editor and has worked for decades as a financial journalist, radio presenter and editor with Australia's ABC, Radio Live and NBR.

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