No recession yet - new data points to GDP rebound

Sentiment has improved for accommodation, cafes, and restaurants as Omicron wave eases. Photo / Michael Craig

Expectations for a solid second-quarter GDP bounce have been strengthened by the latest service sector data, BNZ economists say.

The BNZ-BusinessNZ Performance of Services Index (PSI) came in stronger than expected for May at 55.2 (A PSI reading above 50.0 indicates that the service sector is generally expanding; below 50.0 that it is declining).

This was up 3 points from April, and above the long-term average of 53.6 for the survey.

The services sector accounts for the largest part of New Zealand's economy, (in normal times) around 70 per cent of gross domestic product (GDP).

It includes sectors like tourism and hospitality, transport, technology and entertainment.

"After last week's reported 0.2 per cent decline in GDP for Q1, we remain firmly of the view there will be a solid bounce in Q2," said BNZ senior economist Craig Ebert.

"Not only was Q1 GDP in the bounds of what we anticipated but its details also conformed
reasonably well to our expectations."

"Folk should thus not confuse the recession call we have pitched for later down the track, with the idea that Q2 2022 GDP will confirm a technical recession is already
here. These are two (quite) different things."

Today's result showed accommodation, cafes, and restaurants component of the PSI strengthened further to an unadjusted 61.9 – its highest reading for a May month since the survey started back in 2007.

"It remains to be seen how durable the bounce in the PSI turns out to be. But along with last week's solid PMI reading of 52.9, a lift in the combined index (PCI) adds
weight to our long-held view that GDP will bounce strongly in Q2 following a wobbly Q1," Ebert said.

BusinessNZ chief executive Kirk Hope said that the May result represented the
highest monthly result since June 2021, and the fourth consecutive time showing increased activity from the previous month.

"Obviously, any rush to conclude the sector is now firmly back on track needs to be tempered with the fact that there are still a number of potential headwinds coming, both domestically and internationally," he said.

The two key sub-indexes of New Orders/Business (62.0) and Activity/Sales (59.6) both experienced a healthy pick-up in activity to lead the way in overall expansion.

While Employment (48.5) went back into contraction during May, Supplier Deliveries (45.0) recovered from earlier lows.

With the pick-up in expansion, the proportion of negative and positive comments were exactly even for May, compared with 61.9 per cent negative comments in April, Hope said.

Looking at the wider economic outlook Ebert noted that the latest monthly round of consensus forecasts did not portray a global recession.

"Not even close," he said.

This month's report of consensus forecasts did show GDP growth expectations a lot slower than they were in editions months ago.

"However, for the most part, these were now down to around trend-like, rather than recessionary, while inflation expectations have conversely gone from strength to strength," he said.

"That the consensus is not forecasting a global recession, even a major economic slowdown, could at one level be taken as encouraging (and would help explain forecasts of slow-to-fall inflation)."

"At the same time, if such views are informing the basis for the re-pricing occurring in markets, then there might be charges of over-optimism to consider. Time will tell."