Will we have a second quarter of negative growth?

Gross Domestic Product (GDP) is likely to be negative over the March 2023 quarter says Westpac chief economist Kelly Eckhold.

But while a March quarter GDP fall would technically mark two quarters of negative growth, a recession is not in Westpac’s forecast.

A measure of growth in national outputs, quarterly GDP was -0.6% over the December 2022 quarter. 

Talking to NZ Adviser ahead of March quarter GDP figures (released on June 15), Eckhold (pictured above) said that a second quarter of negative growth was likely.

Just before Westpac’s official GDP preview release was finalised, he said that the bank was forecasting a “small fall” in GDP growth of around -0.2% over the March quarter.

“We’ve got a slightly negative contribution in the March quarter for that, but we see that bouncing back in the June quarter,” Eckhold said. ”Our June quarter forecast at the moment is for a gain of around 1%.”

The key drivers of negative growth over the March quarter include a weak profile for areas such as retail trade, which Eckhold said had been affected by the 12 interest rate increases. 

Cost-of-living pressures on household budgets were also evident, he said. This has affected  consumer confidence and real retail trade, which Eckhold described as “relatively weak”.

According to the StatsNZ retail trade survey for the March 2023 quarter, 9 of 16 regions had lower seasonally adjusted sales values, the total value ($30 billion) down 0.3% compared to the December quarter.

Eckhold acknowledged that the March 2023 quarter captures the impacts of Cyclone Gabrielle, and that various pieces of the GDP were estimated from surveys occurring at set times over the quarter.

Looking at areas such as ‘hours worked’, Eckhold said Westpac observed some signs that GDP may have been negatively impacted due to possible difficulties in undertaking surveys over that time, or due to people being temporarily unable to work.

Westpac GDP forecast differs from Reserve Bank forecast

In its May Monetary Policy Statement, the Reserve Bank forecast a small rise in GDP in the March quarter (0.3%), and negative GDP growth in the June and September quarters (-0.2% and -0.1%).

Eckhold acknowledged that the respective forecasts differed based on estimations of timing around when the impacts of the cyclone would filter through to GDP figures (March or June). Overall, he noted that the Reserve Bank’s GDP forecast was generally weaker than Westpac’s forecast. 

“The Reserve Bank generally has had a less optimistic view about how well the economy will hold up to the interest rate increases that have already occurred,” Eckhold said.

“But also, we have a stronger profile for net migration filtering through the economy than the Reserve Bank did.”

Recession not in Westpac forecast

Economic growth is expected to “gradually decelerate” and run below trend levels for the remainder of 2023 and into 2024, Eckhold said.

Although the Reserve Bank has a recession in its forecast, Eckhold said that Westpac had revised its GDP profile upwards in its latest outlook and removed a recession.

“We don’t have an outright recession in our projections…but it is still a relatively weak growth environment below trend,” Eckhold said. “That’s what’s required in a technical sense to put that downward pressure on inflation.”

Although two quarters of negative growth is technically considered a recession, Eckhold said that economists typically consider broader aspects of the economy, such as the strength of the labour market.

Labour market statistics for the March 2023 quarter showed healthy employment growth and a rise in the participation rate, which is not consistent with a recession, he said.

Commenting on the more positive aspects of the economy, Eckhold said that these were generally the externally orientated sections of the economy. For example, an ongoing recovery in tourism following COVID-19 had flowed through to hospitality and tourism-related sectors, he said.

“Employment growth has been quite robust in these sectors…we’ve had an increase in the workforce come through from migration and New Zealanders entering the workforce, and they’ve been able to find jobs in those sectors, which has helped those sections in the economy grow,” he said.

The overall recovery in China and the expected impacts on New Zealand’s export sector is also encouraging, he said.