'Uncertainty is extreme': Why economists can't agree on just how bad the GDP drop will be

The latest GDP figures, out on Thursday, are expected to show a huge drop. But just how big, no one can agree on.

The economy has had a rollercoaster year thanks to the COVID-19 pandemic, which has made predictions almost a fool's errand.

Treasury expects the June quarter drop will be 16 percent - enormous by historic standards, but much smaller than its previous predictions.

"That forecast change for the GDP that's coming out for the June quarter today was not unexpected," Milford Asset Management senior analyst Frances Sweetman told The AM Show on Thursday.

"It's a big change - they were initially expecting GDP to fall 23.5 percent - they're now saying 16 percent. That's a big shift. Economists are more like 10 to 12 [percent]."

ASB's picking 11 percent, "easily the largest decline on record, but still a lot better than the circa -20 percent forecasts that were doing the rounds in March/April". 

Kiwibank's expecting things to be slightly worse, with a 12.5 percent drop, and the NZIER 10.5 percent. 

ANZ's latest labour market update noted forecasting at present is "riddled with challenges, the likes of which we have never experienced". 

"Uncertainty is extreme, and typical economic relationships cannot be relied upon to hold - at least in the near term. We need to account for a number of factors, such as pent-up demand dynamics out of lockdown, the varying impacts of a closed border at different times of the year, temporary income support measures, efficacy of the policy response more broadly, the varying impacts of the initial shock by region and industry, virus developments, and how the economic shock will broaden over time. 

"Further, renewed lockdown measures are likely to keep the data flow noisy for longer. And even if we pulled off a miracle and managed to forecast everything perfectly, there's no guarantee that Stats NZ will be able to measure exactly what's going on out there. They face significant challenges too."

Sweetman said given the circumstances, it's no surprise the forecasts range so widely - even though the period it's measuring ended two-and-a-half months ago. 

"It was such an unusual time. We were in lockdown, we had huge amounts of stimulus, and frankly no one really had any idea what was going to happen... 

"We have no idea how long the borders are going to be shut for, because that depends on what happens with the vaccine and rapid testing. We have no idea what negative interest rates are going to do to the economy... 

"We didn't realise that having an official cash rate of 25 basis points and all that fiscal stimulus with the wage support was going to see house prices higher, people out spending. We may see that again - we may see an upward revision to outward forecasts. But also, we may not. Frankly, we just don't know." 

Frances Sweetman on The AM Show.
Frances Sweetman on The AM Show. Photo credit: The AM Show

One thing economists do agree on is that the Reserve Bank is likely to put the official cash rate (OCR) below zero next year. 

"What it will do is make banks want to lend, because they will have to pay to store money overnight," Sweetman explained. "They're trying to get the banks to stimulate the economy. The Reserve Bank can only do so much through the official cash rate - ultimately it's the banks that need to go out there and lend. This is one of the things that makes forecasting longer-term so difficult."

Economists should get a better idea of the impact of the pandemic on the economy over summer, with two of New Zealand's biggest industries - hospitality and tourism - likely to suffer during their peak season. 

Strong commodity prices for our agricultural exports can only do so much to ease the blow, said Sweetman.

"It's a smaller part of the economy that it used to be. It's certainly not enough to see strong agriculture offset the weakness we're going to have in tourism and in services and in hospitality. One thing that is positive at the moment is we've got reasonably strong dairy demand from China... We need dairy prices to stay strong. We've got good signals, but we just don't know."

The GDP figures for the September quarter, which covers six weeks of the entire country at level 1 and the rest at level 2 or 3, are expected to show a record jump, with spending levels returning to normal.