Senior economist 'worried' about economy's direction, recession risks 'higher' than in long time

A senior economist isn't concerned about the most recent GDP figures revealing negative growth in the first quarter of 2022, but a "nasty cocktail" of factors is causing him worry about the direction of the economy over the next year.

StatsNZ on Thursday announced that gross domestic product (GDP) - a measure of New Zealand's economic activity - was down 0.2 percent between the start of January and end of March this year. That period saw New Zealand impose new COVID-19 restrictions to combat Omicron. Annual GDP remains up 5.1 percent. 

The quarterly fall was driven by a drop in primary industries - particularly mining, fishing, and forestry - with exports down a massive 14.3 percent for the quarter. 

But while the negative growth quickly caused concern among some - including Opposition MPs - that New Zealand is on the road to a recession, ANZ senior economist Miles Workman told AM on Friday the latest GDP figures aren't all bad when you get into the details. 

"If I look under the hood of the Q1 GDP data, particularly on the expenditure side of the equation, you can see that private consumption - that's households - many of them may have been locked up in their home self isolating, but they still increased their consumption on a quarterly basis 4.6 percent. That's mammoth growth."

While there was a 5.5 percent increase in household spending in the December 2021 quarter, that was during the so-called Delta rebound, as people were heading out after last year's lockdown. Workman said usually it only grows by about 0.8 percent per quarter.

He said most of the issue with exports - the weak spot of the first quarter data - was down to border closures, which have mostly since ended.

"Am I worried about the Q1 GDP data and what that's telling me? No, I think it's noisy. I think there's some good, strong signals under the hood. But I would also note that it's backwards looking."

Thursday's figures weren't all bad news, the economist said.
Thursday's figures weren't all bad news, the economist said. Photo credit: Getty Images.

However, that doesn't mean New Zealand is out of the woods.

Workman explained he is concerned about the general direction of the economy over the next year and beyond. 

"Yes, I am getting worried because interest rates do need to go higher. Inflation continues to surprise on the upside. Confidence is falling. House prices are falling. It's a pretty nasty cocktail. So I think by the time we get to the end of the year, that the domestic and the global economy are going to feel quite different."

With central banks globally trying to tackle inflation by lifting interest rates to dampen spending, Workman said there is a risk that leads to a recession - two consecutive quarters of negative growth - as there is less economic activity. 

"Every time you look out the window and you see more inflation pressures and increasing inflation risks, that therefore increases the risk that central banks around the world, and including in New Zealand, need to just become a little bit more aggressive and that means higher interest rates than otherwise. They really need to dampen down inflation. 

"But every time inflation surprises on the upside, you can think of that as an inverse risk on the activity side. That's going to hurt the economy. It's going to put the brakes on harder than otherwise and that increases the risk of a recession. "

He doesn't believe "yesterday's data release signals the beginning of a recession". Instead, if a recession was to occur, he expects it to be towards the end of the year or in 2023. 

"I'd say those risks are higher than they've been for a very long time," Workman said. 

"I'd say those risks are higher than they've been for a very long time."
"I'd say those risks are higher than they've been for a very long time." Photo credit: AM.

BNZ head of research Stephen Toplis had a similar analysis on Thursday, expecting a recession by the end of 2022 or in early 2023. He believes there could be positive growth in the June quarter given people will be coming out of Omicron, increasing activity.

Workman told AM on Friday morning it's a difficult time to be making predictions. Banks and forecasters were expecting either zero growth or slight positive growth going into Thursday, with the Reserve Bank predicting a 0.7 percent GDP increase.

He said the first quarter was always going to be a battle of the positive impacts of the post-Delta rebound against the Omicron outbreak. Ultimately, Workman said "Omicron won at the end of the day". 

In a statement on Thursday, Finance Minister Grant Robertson said the fall in GDP was a reflection of a "volatile global situation", but that the annual growth figure showed New Zealand "is still well positioned to deal with the challenging global environment". 

The Thursday GDP figures were released as global markets fell in the wake of the US Federal Reserve's decision to increase interest rates by a large 0.75 points. The English and Swiss central banks have followed with their own hikes overnight.

The Bank of England on Thursday night predicted inflation will hit 11 percent in the England in October, up from a previous forecast of 10 percent. One of the reasons for the increase is the expected effects of the war in Ukraine, particularly on energy prices. 

In New Zealand, inflation in the March quarter was 6.9 percent. The Budget Economic and Fiscal Update (BEFU) in May projected annual inflation in 2023 would be 5.2 percent and remain outside of the Reserve Bank's targeted range of 1-3 percent until 2025. 

After lifting the official cash rate (OCR) in May, the RBNZ said it expects inflation to peak at 6.9 percent in 2022, before falling to 4.4 percent in 2023, 2.5 percent in 2024 and 2 percent in 2025.