Economic Weekly: NZ summer spending spree to support GDP

This week’s economic highlight will be the release of the Q1 GDP estimate by StatsNZ, on Thursday 17th June.  We keep an open mind ahead of the release and note that uncertainty remains very high.  Quarterly GDP moves appear to have become more volatile and difficult to predict due to the COVID-19 pandemic and the severe disruption to NZ and global economic activity.  We expect Q1 GDP to record a lift of 0.8% over the quarter, following the previous quarter’s 1% contraction (see our full preview here).  Just a few months ago many economists, including ourselves and the RBNZ, expected that Q1 GDP would register a decline as the summer tourism peak was expected to be hit hard as international visitors remained mostly locked out of NZ.  But the Retail Trade Survey turned that narrative upside down, suggesting that NZ households set forth on a Q1 shopping spree, supporting the hospitality sector through summer and unleashing a retail frenzy for durable goods.  Housing construction is also likely to support a lift in output, despite reports of dire shortages of key materials and labour in the construction sector.  Meanwhile, international shipping delays shifted the pre-Christmas peak in imports to Q1 instead. Overall, Q1 GDP figures are likely to reinforce NZ’s outstanding economic resilience through the pandemic.

Going forward, the ‘so what’ for borrowers, savers and policy makers sits less with GDP outcomes and more with inflation developments.  The RBNZ knows the NZ economy has performed well so far, but GDP has largely tracked sideways since the pandemic – losses in international tourism have been offset by increased domestic household spending and construction activity.  The ability for the NZ economy to grow over the coming year is likely to remain stunted by its closed international borders, impacting demand via reduced international tourism earnings.  But GDP growth is also being impacted via supply constraints from global supply chain disruption impacting the flow of goods into NZ while the supply of labour into NZ is also constrained by the closure of the international border.  These supply constraints, particularly relative to strong NZ household demand, are seeing cost pressures rising and as a result we forecast consumer price inflation lift strongly over the coming year.  The fierce debate among economists is whether elevated rates of inflation will be short-term (i.e. limited to one-year) due to the pandemic.  Or will some of this inflation become persistent and last longer than a year.  For more discussion see Mark Smith’s note on inflation here.  The RBNZ is nervous about the latter and is preparing to lift the OCR sometime next year.  We will be watching upcoming inflation figures very closely over the coming year, to see how much of the cost increase is being passed onto consumers and how much pricing power firms hold.  As a result, this week’s GDP figures could take a less prominent position in policy makers’ and financial markets’ focus.