Inside Economics: The recovery hits a ‘brick wall’ ... why tomorrow’s GDP data won’t tell the real story

Has the New Zealand economic recovery hit a brick wall? /123rf

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Is the economy getting better or worse?

It should be a simple question. But right now it’s anything but.

Here’s why.

Tomorrow we’ll get GDP data for the first quarter, which is expected to be better than expected.

That statement is a non-sequitur for starters.

But that’s economics for you, when forecasts are revised sharply before a big data release, we end up with revised expectations, which can sometimes be ... well ... unexpected.

Economists and the RBNZ had all been expecting 0.4% GDP growth for the first quarter. After some pretty good manufacturing data and strong agricultural sector performance, they are now expecting 0.7%.

That’s good news. But it’s about where the good news ends.

We’re already seeing data from the second quarter that is coming in worse than expected.

To quote BNZ senior economist Doug Steel: “It appears the economy hit a brick wall.”

The “ugly” data that Steel refers to are the latest Performance of Services and Performance of Manufacturing Indexes.

The two surveys of business performance, run by the BNZ in partnership with Business New Zealand – provide an up-to-date snapshot of business performance.

When they are in negative territory, it suggests recessionary conditions.

The results for both sectors in May were really grim.

After a small expansion in January, the sector has contracted month-on-month since then and has now reached its lowest level of activity since June 2024. That was when New Zealand was in a deep recession (in case your memory needed jogging).

Manufacturing was even more disappointing, in some respects.

It wasn’t as bad, but given that in the past few months it had moved into positive territory, the fact it has fallen back into negative is quite a blow to the recovery.

Electronic card data for May also pointed to a stalled recovery.

Card spending in the retail sector fell by 0.2% in May compared to April.

To top it off – and I think this is particularly significant in Auckland – the property market is not coming to the party even as interest rates fall.

The latest REINZ house price index showed just 0.1% growth in May. But in Auckland the price index fell 0.3%, the first fall after several months of very tepid growth.

CV or not CV ... is that even a question?

When we look at confidence drivers in the economy, house prices loom large.

It’s not real money, but while it may be sad and true, most homeowners feel wealthier when they see the capital value of their largest asset rising.

On that basis, the latest round of council valuations (CVs) landing in Auckland inboxes is unlikely to do much for consumer confidence in the City of Sails.

Average residential values have dropped 9% since the last CVs were released in 2021.

But some central Auckland areas saw falls of 14%. Any real estate agent will tell you CVs don’t really reflect the market value of the house.

However, with the market tracking sideways for months now, the CV will have further undercut the “wealth effect” that the housing market typically adds to an economic recovery.

What gives?

So what’s happened to derail the recovery?

There’s the tariff shock we had in April. That may have put a dent in confidence that took a few weeks to transmit to the data.

Markets were rattled, and if you looked at your KiwiSaver balance you probably felt a bit poorer.

The uncertainty may also have rattled business confidence.

Donald Trump campaigned in 2024 on widespread tariffs. Photo / AFP

But as US trade negotiations and policy flip-flops continue, the markets have kind of relaxed and priced in the risk.

KiwiSaver balances have recovered. And while there are still plenty of headaches for local businesses that export to the US, it isn’t necessarily a large enough group to dent the whole economy.

BNZ’s Steel, in his gloomy research note, argues the stalling recovery is quite a concern when we consider we already have the flow-on from lower interest rates and strong agricultural revenue at play.

“Rather than demand indicators incrementally improving, they have sunk,” he says.

“It looks like the positives have been more than offset by other factors, such as significant uncertainty and a soft labour market.”

Tipping point

In my view, there is a tipping point for economic recovery where momentum should start to build more rapidly.

Clearly we aren’t there yet, and it is taking a painfully long time to get there.

The combination of strong export earnings and lower mortgage rates will ultimately prove an unstoppable force.

But it looks like we’ll need interest rates to go lower than they are now.

“The big question is whether the suggested softening in recent activity will outweigh the expected starting point optimism in this week’s Q1 GDP figures?” Steel says.

“There seems every possibility that it will, keeping the output gap heavily negative into the middle of the year. Moreover, the trajectory of the timely indicators suggest the balance of risk is downward.”

That’s bolstering the case for the OCR to be cut twice more (as BNZ forecasts) to 2.75%, or even to 2.5% as ANZ and KiwiBank are advocating.

Wholesale markets had only one more 25 basis-point (bp) cut by the Reserve Bank (RBNZ) priced, which would only lower the OCR to 3%.

“That’s not enough, in our view. We’re likely to need another 50bps beyond that, to get the economy humming once more,“ wrote Kiwibank senior economist Mary Jo Vergara.

“The RBNZ may pause in July at 3.25%, but we expect the data to evolve in a way that demands more rate relief.”

Inflation risk

Arriving yesterday, to further complicate the equation for the Reserve Bank, the latest Stats NZ Selected Price Index showed food prices are still rising.

This is combined with concerns about petrol prices spiking because of the Israel/Iran conflict, which has economists worrying about inflation risk again.

Sluggish demand in the economy is expected to keep inflation subdued in the medium term, but short term, it may be at risk of breaking out of the Reserve Bank’s 1-3% target range.

Westpac senior economist Satish Ranchhod revised his forecast for the second-quarter inflation up to 2.8% yesterday.

BNZ head of research Stephen Toplis went further.

“We had warned there was a risk that annual CPI would push through 3% some time this year. We are now formally forecasting that to be the case. We now pick annual inflation to peak at 3.1% in [the third quarter] of 2025,” he said yesterday.

And yes, that is the same BNZ team who were so gloomy about growth prospects at the start of this column.

“We still believe annual inflation will remain relatively well contained over the medium term and should get back towards the mid-point of the RBNZ’s target band,” Toplis said.

“We think slowing global demand, ongoing spare capacity in the New Zealand economy, slowing commodity price inflation and the potential reversal of any near-term oil price increases could well see inflation fall below 2% for a period of time.”

A short-term spike just increases the complexity of things for the RBNZ.

“The current inflationary noise will intensify the RBNZ’s headache,” says Toplis.

He also sees strong odds of the RBNZ pausing cuts in July, to wait and see which way things break.

Meanwhile, I fear that rising food prices, which consumers tend to feel most acutely, will further dampen confidence and deter domestic retail spending.

Falling forecasts

It can be hard to keep track of all the changes to economic forecasts. So it’s helpful that the NZ Institute of Economic Research (NZIER) aggregates them every three months to give us an overview.

The latest NZIER Consensus Forecasts show a downward revision to the near-term growth outlook relative to the previous release of Consensus Forecasts.

Annual average growth in GDP is forecast to contract by 1.1% in the year to March 2025 before picking up to 1.9% in the following year.

Previous consensus forecasts had annual average growth of -0.8% in the year to March 2025, before picking up to 2.1% in the following year.

“Following the contraction in the June and September quarters of 2024, recovery in the New Zealand economy has been fragile,” says NZIER senior economist Ting Huang.

But there is still a broad consensus that the economy is gradually recovering and that over the longer term, lower interest rates will support a pick-up in growth.

“The soft labour market is driving continued caution amongst households,” Huang said.

“With over half of mortgages due for repricing within the next six months, many households will face further relief in the form of reduced mortgage repayments. This is expected to support a continued recovery in discretionary spending over the coming years.”

Painfully slow it may be, but it seems the consensus of economists still sees things improving over the coming years.

Here’s hoping!

Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to my weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.