New Zealand entered its first non-lockdown recession since 2010 in the March 2023 quarter, with GDP shrinking 0.1%, following a 0.7% contraction the previous quarter. Although this slight decline in GDP confirms that the Reserve Bank’s interest rate rises are having their desired effect, the range of results across different industries shows that some parts of the economy are hurting more than others.
Transport and warehousing, retail, and health care GDP taking a hit
The latest GDP data from Stats NZ reveals that, accounting for seasonal factors, the New Zealand economy has shrunk by 0.8% since peaking in the September 2022 quarter.
Over this six-month period, GDP in the transport, postal, and warehousing industry declined by 5.0%, or $148m in 2009/10 prices (see Chart 1).1 This change could reflect softening demand reducing the volume of goods transported around the country, as well as lower inventory levels due to improved supply chains and anticipation that demand will weaken further.
Unsurprisingly, retail trade GDP has fallen 2.1% since September 2022, as high interest rates and persistent inflation force a cutback in spending behaviour. This decline made retail trade the second-biggest negative contributor to GDP over the last six months. As detailed in our previous newsletter, falling sales volumes for discretionary items, such as electronics and homeware, are driving down overall retail volumes.
Health care and social assistance GDP declined 1.5% over the last six months. Although Stats NZ does not publish more detailed industry GDP figures, monthly employment data shows a combined annual decline of 296 jobs across physiotherapy, psychiatry, and chiropractic services between April 2022 and April 2023. This shift indicates that households might be forgoing less urgent forms of healthcare as their budgets tighten.
Accommodation and food services GDP declined 4.9% over the period, as tourism arrivals have plateaued at around two-thirds of pre-pandemic levels. Growth in the industry has also been hit by households curbing their spending on non-essentials.
The drop in manufacturing GDP has been primarily driven by petroleum, chemical, polymer, and rubber product manufacturing, as well as falling wood and paper products manufacturing. A variety of manufacturing sub-industries have suffered in recent months, possibly due to Cyclone Gabrielle interruptions (given that manufacturing is the largest industry in the Hawke’s Bay Region). An emerging downturn in residential construction could also be starting to negatively effect some parts of the manufacturing industry.
It is also worth noting that professional services GDP declined a massive $254m in 2009/10 prices (or 3.6%) between the December 2022 and March 2023 quarters. However, this decline was smaller than the $284m increase in the industry’s GDP between the September and December 2022 quarters, meaning that overall GDP from the industry actually in March 2023 was still up by $30m from September 2022.
New Zealand’s contraction in GDP over the last six months was mitigated by growth in the construction and information media industries. Overall construction activity has remained strong despite an easing in residential consents since mid-2022, with continued growth in non-residential activity pushing up work put in place volumes up 0.6% between the December 2022 and March 2023 quarters (seasonally adjusted). Information media and telecommunications GDP was supported by increased movie and sound recording activities.
Mixed results reflect mild recession to date
Overall, industry performance has been extremely mixed between the September 2022 and March 2023 quarters, with just under half the industries recording an increase in GDP over the period. The 0.1% contraction between the December and March quarters was extremely marginal, and it is possible that this figure is revised into positive territory, eliminating the recession. The economy is not in freefall, but some momentum has been taken out of services demand, and activity has been hampered in several cyclone-affected industries.
We expect that high net migration, and consequently strong population growth, in addition to continued Cyclone recovery will support national GDP over the coming months. However, the Official Cash Rate is expected to hold at 5.5% until at least early 2024, and inflation is still more than double the Reserve Bank’s 1-3% target. Pressure on household budgets remains acute and this subdued demand will continue to affect activity across a range of industries.
Although the official cash rate is not expected to climb above its current level of 5.5%, higher fixed mortgage rates will continue to place pressure on household budgets throughout coming months. This subdued demand will continue to affect activity across a range of industries. Nevertheless, the broader downturn in GDP will be limited by the effects of high net migration and, consequently, strong population growth, as well as continue cyclone recovery work in some regions.
Our next set of Building and Transport Forecasts for clients will be published on 13 July, and will contain more detail on our updated macroeconomic outlook.
2 We have omitted owner-occupied property from this chart and our analysis.
