Liam Dann: What GDP data really tells us about the economy

Third quarter GDP data was bad but not as bad as feared ... so what can we learn from it? Photo / Alex Burton

OPINION:

The Delta variant slammed the economy in the September quarter causing a 3.7 per cent slump in GDP, the second biggest quarterly fall since 1986.

It was also a considerably better performance than most economists expected.

Markets had priced in a 4.1 per cent fall and the kiwi dollar rose half a US cent on the news.

In fact, the RBNZ had forecast a 7 per cent fall - which means it likely faces more inflationary pressure than it has currently accounted for.

That means interest rates could rise faster, or at least that the bank's forecasts for rises throughout 2022 now look even more certain than they did.

So was GDP good news or bad news?

As ever, you can take your pick on how to read the data. The politicians sure did.

Finance Minister Grant Robertson was quick to claim it as positive, highlighting the resilience of the economy and the fact that - on an annual basis - the economy was 4.9 per cent larger than the previous year.

But Act leader David Seymour focused on the immediate damage done and described it as an indictment on the Government's failure to prepare for the Delta outbreak.

Both views offer some truth - depending largely on how we contextualise events.

To be fair, Robertson's view is more reflective of the analysis coming in from mainstream economists right now.

They've already priced in the economic hit and moved on.

But if we step back from the detail and market expectations it's hard to dismiss the fact that the economy suffered.

The sectors hit hardest were those most affected by lockdown measures.

"Retail, accommodation, and restaurants" was down 13.3 per cent.

"Arts and recreation" was down 11.9 per cent.

Others hit hard were construction, down 9.6 per cent, and manufacturing, down 7.6 per cent.

But some - like IT and media - were barely dented (down 1.7 per cent).

Financial and insurance services and the real estate sector, by comparison, kept growing.

The final extent of the Delta damage won't be revealed until we get the December quarter data (in March).

It seems likely that construction and manufacturing will have bounced back quickly with the move to lower alert levels.

The extent of the rebound for the others is far from certain, although retail demand appears to have held up well.

"The contraction is purely mechanical and does not reflect underlying demand – which we know is strong," said Kiwibank chief economist Jarrod Kerr.

"Pent-up demand, a strong labour market and a significant pipeline of construction activity will underpin the Q4 rebound."

So what then, if anything, does today's GDP data really tell us?

It tells us we are learning to live with this pandemic.

We are getting better, on a collective level, at coping with the lockdowns and restrictions that life in a global pandemic brings.

"The NZ economy got through the Delta-induced lockdown better than hoped," said ASB senior economist Jane Turner.

"Our early forecasts were for a quarterly decline closer to 7 per cent or 8 per cent and [this compares] to the 11.4 per cent contraction over the first half of 2020 as a result of the first alert level 4 lockdown."

Deputy Prime Minister Grant Robertson. Photo / Mark Mitchell

The June 2020 quarter slump of 10.3 per cent was the worst since modern records began in 1986.

That fall did reflect the big adjustment as international tourism activity was halted, StatsNZ national accounts industry and production senior manager Ruvani Ratnayake said.

But "some businesses may have adapted to and been better prepared for higher alert levels, compared with the first lockdown," she said.

At a sector level contractions were far smaller than last year, said Kiwibank's Kerr.

"For example, transport fell only by 3.3 per cent (quarter on quarter) this time around, compared to a massive 26.5 per cent drop last year.

"The economy was more operational than last year. Activity was shifted to online, and trading continued despite physical stores being closed."

Business confidence held up better through this latest lockdown. Firms were more reluctant to let staff go.

Consumers felt more secure in their jobs. The housing market kept booming.

We are adapting and evolving. We are getting the systems and infrastructure in place to shift in and out of various alert levels more seamlessly.

The Government has the mechanisms in place to deliver financial support quickly and, if not without bureaucratic hurdles, certainly more smoothly than it did in 2020.

For some of the hardest-hit - especially in Auckland - this will all seem like cold comfort.

The cumulative effect of the pandemic on some - like accommodation, arts and recreation - will cause business failures and lasting economic damage.

But with more pandemic uncertainty to come as the Omicron variant spreads around the world, it is heartening to see a framework and pathway for economic survival beginning to emerge.