Construction led the way to the March quarter's surprising 1.6% GDP figure

Yesterday’s boom GDP figures appear to have caught much of official Wellington by surprise.

Only hours before the 1.6 per cent for the March quarter figure appeared, the Ministry of Primary Industries was assuring Field Day farmers that economic growth was likely to be modest in 2021 and gradually pick up in 2022

“While the New Zealand economy has proven to be more resilient than expected, economic growth is likely to remain modest for the year ending December 2021,” it said.

MPI said the New Zealand economy would not recover until pre-Covid levels until at least 2022.

Contrast that with Kiwibank’s Jarrod Kerr, who once he saw the 1.6 per cent figure called it “remarkable.”

 “You’d be forgiven for thinking that was the annual rate,” he said.

“But the annual rate was 2.4% – compared to consensus expectations of 0.9%.

“The economy has confidently returned to pre-Covid levels.”

That was pretty much echoed by other bank economists.

Miles Workman and Sharon Zollner from the ANZ said overall, the data confirmed New Zealand’s economic recovery had been spectacular relative to early-pandemic expectations.

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“And while there are still pockets of weakness, they are getting hard to identify at the aggregate level,” they said.

Gregorious Steven and Michael Gord from Westpac said they weren’t surprised by what drove the strength in domestic activity, “what was surprising was the magnitude.

“Sectors such as construction, wholesale and retail trade recorded even larger gains than what their respective surveys indicated,” they said.

ASB said Domestic demand is much stronger than what most economists had expected.

“Just a few months ago, many economists expected to see the first quarter  GDP contract and the RBNZ pencilled in a 0.6% decline at the May Monetary Policy Statement,” they said.

Consequently, the banks are all forecasting inflation to start rising and, therefore, an increase in the Reserve Bank’s Official Cash Rate.

Kiwibank picked May for an increase; so did ASB but added that, but strong economic data now skews the risk to an even earlier move than that. 

The ANZ was the boldest, suggesting that there could be a rate rise as early as February.

That would receive a muted welcome in the Beehive because of its potential to further cool the housing market.

However, behind this is a real concern about labour shortages and supply chain hold-ups.

The supply chain hold-ups caused by the recent closure of Shenzen port in China and problems here with connection, business sources say that particularly in Auckland, things look on the way to being resolved.

The bigger concern is labour.

Finance Minister Grant Robertson has been inundated with pleas from business to free up Managed Isolation and Quarantine places for workers.

Beehive sources suggest the Government is beginning to worry about this though Robertson made no reference to it in his statement yesterday welcoming the high GDP figure.

The stark reality of the labour shortages is evident in the MPI report.

It says production of the 2021 apple and pear crop was expected to be 5 to 10 per cent lower than the 2020 crop, despite an increase in the planted area because of a significant hail event in the Nelson-Tasman region in December 2020 that caused moderate to severe damage to around 9 per cent of New Zealand’s apple and pear planted area and smaller average fruit size for some apple varieties.

“And a shortage of labour for harvest, particularly in the main growing region of Hawke’s Bay.

“The final production volume will depend on how much fruit was harvested for processing, including hail-damaged fruit, and fruit that was by-passed during the main harvest period because of constraints in labour supply.”

And it says some growers are likely to consolidate their plantings to the most profitable orchard blocks and varieties to manage the risk of constraints in seasonal labour supply in the short term.

Overall, though, the Ministry is bullish about agriculture’s prospects.

“For the year ending June 2022, export revenue is forecast to rebound and reach a record $49.1 billion as demand begins to recover for our main export market products and destination markets,” it said.

“In addition, the labour supply situation is expected to improve as more skilled and seasonal food and fibre sector workers enter New Zealand, or are recruited from within New Zealand in the future, and COVID-19 supply chain disruptions are eventually resolved.”

But though the ANZ Bank said the domestic economy was stronger than anyone could have hoped for, the GDP result was “structurally ugly”, and it warned that constraints like labour shortages could be a worry in the future.

“There is still volatility under the hood,” it said.

“It’s very clear that parts of the economy are trying to grow faster than capacity will permit, while other parts continue to struggle with closed border impacts.

 “Looking forward, buoyant business sentiment, strong labour demand, high export commodity prices, and a little extra fiscal stimulus suggest the domestic demand pulse will withstand a gradual slowing in the housing market (with momentum holding up so far).

“But with capacity pressures biting in many pockets of the economy, the outlook for further expansion is just as much a function of lifting supply constraints as it is demand.

“With migration severely restricted and global disruptions of imported goods very persistent, we’re likely to see more inflation for a given level of activity over the year ahead, compared within ‘normal’ times. “

 The bank is also concerned about the loss of tourism and foreign students.

“Exports of services fell 20.2% quarter on quarter and are down almost 50% versus a year ago,” it said.

“Tourism was NZ’s largest export earner before this crisis(with a lot of this income earned in the summer months), and education exports were no slouch either.

While the hole in GDP has been largely filled by debt-fuelled domestic activity (both household and government debt), debt is hardly a sustainable substitute for this lost income.”

So that becomes now the big imponderable; when will the borders be able to re-open.

The Prime Minister said yesterday that the Government was monitoring the international experience on this.

 “Hopefully, of course, there are some countries who are gearing up their border restrictions, albeit they don’t have the same approach to Covid as us, but they are gearing up their border restrictions alongside their vaccination rollout,” she said.

“That will give us a bit of an indication as to whether or not that can be done safely.

“We are asking our expert groups like Professor David Skeggs and his team to go away and consider what a vaccination rollout will mean for the way that we operate our borders in the future.

“So we’re doing that work right now.”

Ardern said she had asked for the modelling to be using different factors.

“If you have pre departure testing and arrival testing, how does that vary the way that you’re able to work,” she said.

“We expect some of that modelling to come through in the near future.”

She said the most important point was having the greatest number of people vaccinated and that could provide a chance to change the way things were done at our border.

And she appeared to endorse the idea of vaccination certificates for people seeking to enter New Zealand.

“I think it would be very unusual if New Zealand didn’t have some of those requirements,” she said.

“Keep in mind, it will hopefully give us more flexibility about the way we deal with managed isolation.”

Slowly, day by day, we are returning to normality with the economy leading the way, it would seem.