The recent release of December 2022 quarter GDP data means we finally have three full years of economic data on the COVID-19 pandemic. With the last two quarters of 2022 being without COVID-19 restrictions, we’re also starting to get a clearer read on how the economy is performing without pandemic restrictions. But intense and persistent inflation, and rapidly rising interest rates, have added a new complication to the mix.
Nevertheless, we thought we’d briefly examine how the economy has fared over the course of the last three years, and how the changes to different industries have helped reshape recent economic trends in New Zealand.
Economic activity levels out at the end of 2022
Economic activity at the end of 2022 fell 0.6%, a steep fall, but was preceded by a (revised) 1.7% boost in the September 2022 quarter. That level of strength meant that economic activity was still 2.1% larger than at the end of 2021, and up 6.7% from pre-pandemic levels.
Economic activity had been growing at an annual average pace of around 3.3%pa over the five years between 2014 and 2019. If that growth rate was applied into the future, current economic activity would be below expectations. At the end of 2022, current economic activity was sitting 3.1% below the 5-year average growth track.
However, expectations at the end of 2019 weren’t for the same stronger levels of economic growth to continue, and the October 2019 Infometrics forecasts suggested an annual average growth rate of 2.1% between 2019 and 2022. In reality, through some big ups and downs, the average over that period was 2.2%pa. Economic activity at the end of 2022 was sitting 0.04% higher than our pre-pandemic forecast.
Professional services activity up 25% from pre-pandemic levels
Despite the fact that economic activity in December 2022 was almost exactly where we’d have expected it to be, the changes in industry trends are substantial. As Chart 2 shows, economic activity by high level industry ranges between 25% above pre-pandemic levels to -20% below.
Professional services activity is over 25% larger than pre-pandemic, highlighting the rising requirement from government and businesses to examine business operations and ensure that changes can be understood and implemented. This industry, and others, have also faced far less disruption to operations throughout the pandemic period, and could work from home/remotely to a much higher degree than many industries.
Reassuringly, given the pandemic, the health care and social assistance industry is the second largest grower since COVID-19 hit, as additional resources were deployed to increase what the healthcare sector could provide – although some challenges remain.
Increased IT investment and a focus on technology has supported the third-largest increase, for the information, media and telecommunications industry.
Although we won’t profile every industry here, two others are important to note. Construction activity has increased by just over 11%, and is around middle of the pack for industry growth, despite having one of the largest increases in employment. Considerably higher construction costs and delays have meant that employment in construction has surged ahead of output levels.
Accommodation and food services is also interesting, with economic activity in that industry up 2.5% from pre-pandemic levels. Given the incredible challenges posed by losing international tourism for the best part of two years, highlights the resilience inherent in the New Zealand economy.
A total of six industries were smaller at the end of 2022 than at the end of 2019. The slight fall in agriculture highlights higher costs faced by the sector, alongside lower output in dairy and other parts of the sector. Forestry and logging have similarly been hit by higher costs, as well as a more challenging international environment. Education activity hasn’t yet regained the activity lost from international students. Mining is struggling, compared to where it was a few years back.
The fall in manufacturing activity is slightly misleading. A key driver of the decline in manufacturing is the closure of the Marsden Point Oil Refinery, which has seen petroleum production collapse in the official figures. The site is now an import terminal, and has been reclassified as in wholesale trade (hence the stronger increase in that industry). Excluding the petroleum, chemical, polymer and rubber product manufacturing industry (which is down 54%), manufacturing activity is sitting 2.1% higher. Transport and machinery manufacturing has been the key driver of higher non-fuel manufacturing.
New challenges for the economy to face
Although the COVID-19 pandemic is not over, the sole focus on the pandemic has been replaced with a wider variety of challenges – economic, social, and more. On the economic front, persistently high inflation, rapidly rising interest rates, and the best-signalled recession in modern memory all present challenges for 2023 and beyond. A downturn in spending activity will hit retail and other industries, and higher interest rates and correspondingly lower house prices, amid high construction costs, will see construction activity wane. This snapshot of economic activity doesn’t highlight how industries will respond to the next challenge but does provide a waypoint to assess how the economy has ended 2022 after three years of a global pandemic.
