It’s bad – but not as bad as you might think, writes economist Brad Olsen.
It’s been a grim week of economic news. The US stock market has entered bear territory. Food prices are up 6.8% over the last year. And now the New Zealand economy has shrunk 0.2% at the start of 2022. It wasn’t the start we wanted for the year, but reflects the omicron disruptions across the country, still-disrupted supply chains, and intense pressures both overseas and here in New Zealand.
That 0.2% fall means that, in simple terms, the New Zealand economy was smaller after the first three months of 2022 than at the end of 2021, because the amount of output across the economy fell. The main driver of this decline was that we didn’t sell as much stuff overseas – exports were shockingly weak.
Despite the downbeat headline figure, there are parts of the New Zealand economy that are still showing admirable momentum, especially given that omicron was hitting during the early part of the year. At the same time as the entire economy contracted, domestic-based activity actually rose 2.6% (seasonally adjusted).
Household spending rose 4.6% in the March 2022 quarter, regaining further ground after a weak end to 2021 when delta restrictions were still in place. Despite the red setting at the start of 2022, spending was still up 1.1% from a year earlier, and almost back to the “normal” level we’d expect without the Covid-19 pandemic.
Investment spending (on buildings, infrastructure, factory machinery, etc) is also robust, with total “gross fixed capital formation” up 4.8% from a year ago.
Government cash is also boosting economic demand. Year-end growth in government consumption reached a new post-1970s high of 10.4%, with central government spending showing no signs of easing back from the breakneck pace that has persisted for the last year and a half.
The tl:dr here is that households are still spending, businesses are investing, construction is continuing, and government is stimulating.
The GDP killer this quarter was exports, which recorded a whopping 14% seasonally adjusted decline in activity. After being a key backbone of economic activity over the last two years, export volumes pulled back to be at their lowest since 2009.
The export weakness was widespread, with the biggest contributions to the quarterly decline coming from services (-25%), metal products, machinery and equipment (-12%), dairy products (-5.6%), meat products (-10%), and agriculture and fishing primary products (-10%, all figures seasonally adjusted).
The services sector (tourism, international education, other business service exports) is still seriously messed up, and will be until tourism rebounds, which will start to show through in coming months with the border reopening.
But weakness in our agriculture exports is troubling. It looks like a combination of things have hurt exporters. Supply chain disruptions and restricted export shipping capacity mean that it’s expensive and uncertain to actually get our product overseas. High input costs are making it difficult to produce as much, both because people are trying to keep costs down, and because supplies are difficult to acquire. Fertiliser prices are at least double what they were a year ago. And the lack of available workers means we’re struggling to find people to actually do the work in the primary sector.
Fewer workers mean less production, and less production means lower GDP. Despite high prices for our primary exports at the moment, all these factors might be keeping production limited – and concerningly, there’s no clear end in sight for any of these challenges.
So where does this leave the New Zealand economy? And will we see a recession?
The short answer is probably yes. Keeping household spending levels high is going to be a challenge, with the housing market softening, inflation roaring, and interest rates rising. Household budgets are under pressure, and anything that isn’t essential spending will likely be pared back. In the firing line are transport and travel, restaurants and hotels, and recreation and culture.
Inflation remains a persistent problem and getting it under control means that interest rates need to go higher, limiting spending to dampen demand to a level that we can actually resource. We’ve got a brain drain going now, along with real difficulties finding enough materials and people for us to build, manufacture, and staff our businesses.
Given the strength of demand pressures and inflation, the government also needs to do its part and rein in spending. The government is also facing capacity constraints, and unless it recalibrates and prioritises the projects it wants to get done, it will simply exacerbate the delays and cost pressures that are being experienced across the entire economy.
It’s going to be difficult to keep economic momentum going at current levels. The fall in GDP at the start of the year is just the warning shot. We’re currently overcooking the economy and leaving the motor to burnout without any oil left to keep things moving. The aim now to is achieve enough of a reset to bring demand lower, allow supply to catch up, and be more focused on where in the economy we can direct our precious, limited, talent and resources.
There’ll be a recession, but probably not like we remember previous recessions. This one looks set to be a realignment after we’ve run too far ahead of our supply lines, and now it’s time to consolidate and take the pace down a notch.
Brad Olsen is principal economist at Infometrics.