Friday, 15 Oct 2021

Westpac economists forecast second ‘technical recession’ for NZ

A Summer without tourists will cause New Zealand’s GDP to fall 0.7 per cent over the six months to March, economists at Westpac are predicting.

The situation would technically be a recession – which is defined as two quarters in a row of negative GDP growth.

But Westpac chief economist Dominick Stephens said while that would technically be the case what he was pointing to was the seasonality of New Zealand’s GDP caused by the lack of international tourists.

“It is not what I am trying to emphasise, it is technically…if you look at the ups and downs of GDP I suppose you could characterise it that way but….what I’m saying is the seasonal vagaries of the data mean that the data looked stronger than it really was through the winter last year, will look weaker than it really is through the Summer and will look stronger again through the winter.”

Stephens said overall the economy had bounced back far more vigorously than expected but 2021 was going to be a year where it was hard to find further growth because the borders remain closed.

“The truth is the economy has smashed more pessimistic expectations.”

Westpac is forecasting GDP to be up just 2 per cent in 2021 and is predicting a bumpy ride in the near term.

“Tourism is highly seasonal, and there is normally a strong net inflow of people into the country in the summer months. The absence of visitors was felt keenly in the December quarter, and will be even more so in the March quarter, which would have otherwise been the peak tourist season.”

They estimate that the absence of overseas tourists cost the country around 2 per cent of GDP in the September quarter and that will rise to around 6 per cent by the March quarter when tourism normally peaks.

“This means that some of the upcoming data, once seasonally adjusted, will show the
economy slowing or even going backwards. We’re expecting overall GDP to shrink by 0.7 per cent over the December and March quarters combined.”

The flipside was that GDP growth would be boosted in the June and September quarters by New Zealanders staying in the country.

“Looking through this disruption in seasonal patterns will be a challenge for markets, forecasters and policymakers over the next year.”

With international tourists largely out of the picture, they say economic drivers will be dictated by domestic spending and the housing market.

“What will play the biggest role in household spending appetites, however, is the red-hot housing market. House prices are now screaming higher, with a 9 per cent increase in the
last three months of 2020 alone. Our analysis has long shown that financial factors, and in particular interest rates, are by far the biggest driver of house prices. And with mortgage rates at record lows, there is scope for further significant gains in prices.”

They are forecasting a 17 per cent rise in house prices over this year. But they believe mortgage rates have reached the low point for this cycle.

They expect the official cash rate to stay on hold at 0.25 per cent until 2024.

But they continue to warn that when interest rates do eventually rise, house prices will fall.

Stephens said the latest lockdown won’t necessarily alter the forecasts, so long as it is relatively brief and doesn’t progress to Level 4.

“The August episode of elevated Alert Levels had little discernible impact on overall economic activity. This suggests that the early estimates of the economic cost of a temporary Level 3 lockdown were too pessimistic.

“When people are temporarily barred from certain economic activities, they often divert their spending to other things or undertake the same spending at a later date. Of course, this doesn’t detract from the fact that some individual businesses will be hit hard by even a temporary lockdown,” he said .

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