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Economists expect contraction in New Zealand’s Q3 growth

03:04, 16 September 2021

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Auckland CBD at night
Auckland CBD at night - Photo: Shutterstock

With an outbreak of the Delta variant of Covid-19 plunging New Zealand into a lockdown since August, economists expect a contraction in the country’s gross domestic product (GDP) during the third quarter of 2021, followed by a revival in the fourth quarter of 2021.

“GDP is poised to contract sharply in the third quarter. And with Alert Level 4 dragging on in Auckland, our forecast for a 6% q/q [quarter-on-quarter] contraction in the third quarter is starting to look a little optimistic. However, all going well, Auckland will be on a clear path towards Alert Level 1 by the end of the month, and that will set the stage for a sharp rebound in the fourth quarter,” Miles Workman, senior economist at Australia and New Zealand Banking Group (ANZ), wrote in a note.

Similarly, Ben Udy, Australia and New Zealand economist at Capital Economics expects a contraction in the third quarter of 2021. “The rise in New Zealand’s activity in the second quarter will be well and truly undone in the third quarter due to the lockdown in August and September but as restrictions ease we expect growth to rebound again in the fourth quarter,” he wrote, adding that he expects the contraction in the third quarter to be 4%.

NZ economy was 'running hot'

Westpac’s acting chief economist Michael Gordon and economist Gregorius Stevens also expect a contraction followed by a sharp recovery. “Given that the economy was running hot going into the lockdown in August, the prospect of another V-shaped rebound becomes more likely. Once the risks of the current Covid-19 outbreak clear, along with today’s result, this should bolster the Reserve Bank of New Zealand’s willingness to start raising the official cash rate,” wrote Gordon and Stevens.

Expectations of a strong recovery in the fourth quarter of 2021 are aided by the strong growth of the GDP during the second quarter of 2021. According to the latest data released by Stats NZ on Thursday, gross domestic product (GDP) for the second quarter of 2021 rose by 2.8% quarter-on-quarter, double the pace of growth in the first quarter of 2021. In the first quarter of 2021, GDP growth was 1.4% quarter-on-quarter.

The numbers are impressive even when compared to those before the Covid-19 outbreak. According to Stats NZ, the GDP in the second quarter of 2021 was 4.3% higher than that in the fourth quarter of 2019, the quarter immediately before New Zealand’s first Covid-19 case was reported and movement restrictions were imposed.

Service sector-led Q2 growth

“The June 2021 quarter [second quarter] experienced fewer Covid-19 restrictions than previous quarters affected by Covid-19. Many industries experienced activity at or above pre-Covid-19 levels, while some remained below,” national accounts senior manager Paul Pascoe said.

Growth during the quarter was led by the services sector, primary goods-producing industries also contributed to growth in the quarter. The travel bubble between Australia and New Zealand appears to have helped the economy significantly.

Further, according to Pascoe, the traditional seasonality of New Zealand’s travel sector has been changed by Covid-19. He said that before the pandemic, the second quarter was traditionally one which showed a decrease in international travel. “However, Covid-19 has interrupted that seasonal pattern markedly,” he added.

Trans-Tasman travel bubble

“The Australia-New Zealand travel bubble seems to have provided a huge lift to the accommodation and transport sectors… The fact that tourism numbers usually fall during the winter months seems to have upset the seasonal adjustment,” said Udy of Capital Economics.

Udy added that the travel bubble also helped the 17% surge in exports as services exports rose by a whopping 63% quarter-on-quarter.

Read more: Kiwi central bank keeps rates on hold after single COVID-19 case brings back lockdown

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