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Record drop in NZ’s GDP – Expert Reaction

New Zealand’s GDP dropped more than 12 per cent in the June 2020 quarter, the largest quarterly drop since records began in 1987.

StatsNZ says measures to contain COVID-19 have led to historically large falls in GDP in many parts of the world, “with countries’ results reflecting the nature and timing of their responses, and the structure of their economies.”

 The SMC asked experts to comment on this news.

Associate Professor Sara Walton, University of Otago Business School, comments:

“GDP measures the total value of goods and services produced in a country and given the unprecedented lockdown we have experienced, the results are not surprising – although given that we went back to Alert Level 1, it is slightly surprising that we have such a high figure compared with other countries. This could be indicative of our reliance on international tourism to boost our consumption of goods and services. While our borders are closed it is going to be difficult to build business confidence in hospitality and tourism.

“Once again our position points to looking for business leadership in what our next normal is going to be and how we are going to get there. The past ‘business as usual’ is no longer. The disruption caused by COVID-19 has changed our economy substantially and given what we have ahead of us – pandemic, climate change etc. Let’s take the opportunity of Aotearoa being seen as a place that has globally lead the elimination of COVID-19 and use that to build ‘NZ Inc’ for the future. It’s going to be a rough and uncomfortable journey but one that we need to get started.”

No conflict of interest

Professor Ilan Noy, Chair in the Economics of Disasters and Climate Change, Victoria University of Wellington, comments:

“This is not really news to anyone; practically every country around the world (maybe with the exception of China) has experienced a deep recession in Q2 2020. The news is the amount of decline (for us 12%).

“We need to take these numbers with a large grain of salt, as they will be revised a lot in the months to come. This recession is unique, as it was brought about by an unprecedented lockdown policies (here and elsewhere around the world so the standard statistical methods are ill-suited for such an unprecedented event, and will need to be continually revised.)

“Second, this is a large decline, maybe around the OECD average (with some countries experiencing much deeper declines in Q2). But, the important question is the recovery in Q3, and I think that we are well placed to see a stronger recovery in Q3 than elsewhere. So, this should not be a gloom and doom story, but rather one that points out that what happens next is what matters. Since this is a self-imposed recession, and we have done many of the right things to keep the economy on a lifeline during lockdown, the questions that should be asked are around whether we are doing the right things to recover in Q3 (and Q4, since Q3 is almost over already).”

Conflict of interest statement: I have no conflict of interest with respect to this opinion.

Professor Martin Berka, Head of School of Economics and Finance, Massey University, comments:

“The fall in GDP is within the range of economic forecasts and reflects, amongst other things, the strength of New Zealand’s economic restrictions during Level 4 and 3 lockdowns that lasted much of the second quarter. Although the relationship between economic cost and Covid-19 outcomes is nonlinear (having no restrictions and having maximum restrictions both achieve negative economic outcomes), New Zealand clearly opted to go for the more hardline approach regarding Covid-19 health outcomes, and on the margin this resulted in worse economic outcomes relative to similarly-well-organized countries that chose a lesser degree of economic restrictions (such as Germany, South Korea, the Netherlands, Taiwan, etc.). It’s a societal choice, made by the government.

“With a supply of housing being always somewhat delayed in its response to current market conditions and the national income expected to decline this year, it would be rational to expect the house price growth to subside. However, demand (in part due to strong incipient net immigration), as well as the low real interest rates, will continue to support the housing market and should prevent any major price correction. New Zealand’s house market continues to be severely unaffordable, a well-known problem not addressed by consecutive governments. The affordability constraint may be temporarily eased but the structural problems will remain post-Covid.”

Conflict of interest statement: I have no conflict of interest with StatsNZ or the GDP disclosure.

Professor Philippa Howden-Chapman, Department of Public Health, University of Otago, Wellington, comments:

“Building of new affordable houses and remediating old public housing is an important part of the economy, which is improving despite the current COVID-19 recession. Construction is about 7 per cent of the economy and the scaling of Kāinga Ora-Housing and Communities to build 8,000 additional houses is an area where productivity is increasing despite the recession.

“Additionally, construction of horizontal and vertical infrastructure represents about 20% of carbon emissions, so is an important part of our efforts to become carbon neutral by 2050.  Along with the government’s investments in apprenticeships, this area of the economy has a clear run-way to improving warm high-quality affordable housing for people on low incomes, in communities with green space and other amenities for walking and cycling.”

Conflict of interest statement: “I am speaking as an academic, not as a director of the Board of Kāinga Ora – Homes and Communities. Any opinions I express do not necessarily represent the opinions of He Kāinga Ora.”

Professor Ananish Chaudhuri, Faculty of Business and Economics, University of Auckland, comments:

“The projected drop in GDP is less than originally anticipated. Most people were forecasting larger drops. Earlier forecasts by RBNZ suggested a potential drop of nearly 9% if we stayed at Level 2, a drop of 19% if we went to Level 3 and 37% at Level 4.

“If those forecasts were reasonably accurate, then the news is better than expected. One could potentially argue that the additional economic harm from going to Level 4 in April and then to Level 3 in Auckland in August are not that high.

“However, this is only one quarter. It is also possible the wage subsidy has prevented a larger drop in consumer spending and therefore aggregate demand.

“The larger story underlying this recession may be the one about unemployment. New Zealand is currently at about 4% unemployment. This is about 140,000 people. Current forecasts suggest that we will not get back to this level till 2027. Unemployment will hover much higher (around 7%-8%) for the intervening period. This is much worse than what we experienced during the global financial crisis. This is an additional 105,000 to 140,000 people unemployed each year for the next six to seven years. I think this is going to problematic in terms of sharply increasing existing inequalities.

“I think we will have a more realistic picture by the end of the year. So, on one hand yes, we are in a recession. It could get much worse or it may not. A lot will depend on the government’s pump priming via deficit financing, on what happens to overseas conditions, and how quickly we can open up our borders.”

Conflict of interest statement: “I am part of a group called Covid Plan B which has been critical of the government’s handling of the pandemic.”