New Zealand’s GDP rose by 1.6 percent in the March quarter, but continued volatility paints a murkier picture of the economy’s recovery from Covid, economists say.
Three-month-old data isn’t much help when assessing the health of the economy during one of the most uncertain periods in modern history.
The latest Stats NZ’s latest GDP figures show in the three months to March, the economy did exceedingly well rising 1.6 percent, but volatility continues.
Quarterly growth has been fluctuating since the economy declined 11 percent (revised from 12.2 percent) in the June 2020 last year.
The data indicates growth across sectors, but construction (up 6.6 percent) and household spending (up 5.4 percent) were the stars.
Stats NZ national accounts senior manager Paul Pascoe says households spent more on accommodation, dining, and splurged on big ticket household items.
“This helped support the growth in retail trade and accommodation industry and wholesale trade industry,” Pascoe says.
Retail NZ chief executive Greg Harford says sales among the associations’ members have been back to pre-Covid levels, if not better.
Although sales have been up, Harford says the costs of doing business have also increased significantly over the past year with the minimum wage hike, doubling of sick leave to 10 days and freight prices rising.
He says there is still a lot of uncertainty among retailers about how long supply pressures will impact their operations.
“The overarching issue is I do find these numbers suspiciously strong.”
– Michael Gordon, Westpac
Similarly, for construction, while the residential sector is booming, supply constraints are causing delays.
Construction rebounded 6.6 percent after a fall of 8.4 percent in the December 2020 quarter.
Registered Master Builders chief executive David Kelly says there has been an “unprecedented” level of demand in residential construction and renovations.
But Kelly says increased demand has stretched timber processing facilities.
“Saw mills and treatment plants are at full capacity. They can’t really do much more unless there is investment in manufacturing, and that will take time.”
Kelly says delays in getting raw materials for construction will continue for another 12 months.
ANZ chief economist Sharon Zollner says there is still a lot of volatility in the data, making it difficult to judge how the economy is actually doing.
“There is no shortage of demand in this economy, but there is hampered supply. Particularly in imported goods for manufacturing, construction and agriculture, as well as labour,” Zollner says.
She says Covid exposed how reliant the economy has been on migrant labour and these supply constraints will crimp growth more this year than a lack of demand will.
“The upshot of this is that the economy is stretched and is trying to go faster than it can, and that is inflationary,” Zollner says.
“There is clearly a huge amount of inflationary pressure, much higher than we’ve seen before. The main question is will it stick around or just a flash in the pan?”
Zollner says inflation expectations can also be a self-fulfilling prophecy.
“If everyone’s got the impression inflation is up there and will stay up there, it makes it much easier for firms to pass on the cost without backlash.”
The bank expects inflation and wages to lift and the Reserve Bank will have to react.
“This not the type of inflationary expansion central banks can ignore. The Reserve Bank has a positive outlook and thinks there is spare capacity in the economy.
“But we think this GDP out-turn will make the Reserve Bank change their minds about that.”
ANZ has changed its forecast on when interest rates will increase to February 2022, six months ahead of its previous forecast of August 2022.
Zollner says the June quarterly data will continue to paint a choppy picture, particularly annually as last year’s second quarter was so poor due to the effects of the level 4 lockdown.
“We’ll definitely be focusing on the quarterly change rather than the annual one.”
“There is clearly a huge amount of inflationary pressure, much higher than we’ve seen before. The main question is will it stick around or just a flash in the pan?”
– Sharon Zollner, ANZ
Westpac acting chief economist Michael Gordon says it will take years before we can start to gauge how Covid has impacted the economy.
He says the magnitude of growth in the March quarter was surprising.
“The overarching issue is I do find these numbers suspiciously strong.”
Since Covid hit Stats NZ has been trying to use other data sources and approaches to estimate the Covid disruptions have had on particular sectors’ activity, he says.
“I’m not sure that’s helping or hindering our understanding of the economy.”
“And in some cases it might come down to the difficulties of measuring the post-Covid economy,” Gordon says.
He says this underscores the importance of using a broader range of measurements when assessing the economy and also values the present importance on labour market indicators.
“An unemployment rate is not going to be subject to measurement difficulties. We’ve got an unemployment rate of 4.7 percent that is much better than we expected but still not what I’d call an overheated economy.
“We need to be looking at a broader measure of activity indicators rather than taking GDP as gospel given the potential measurement difficulties.”
