GDP shock: Economy slumps in final quarter of 2020

Vacant retail premises are feature of most cities and towns in NewZealand. Photo / Kelvin Teixeira

New Zealand's economy shrank sharply in the last quarter of 2020 according to new data from StatsNZ this morning.

The 1 per cent drop in gross domestic product (GDP) in the December 2020 quarter was worse than expected.

In the lead-up to this result, economists had been divided with some picking a contraction while others saw momentum from the post-lockdown rebound carrying on to keep things in positive territory.

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GDP declined 2.9 per cent over the year to December 2020, the largest annual fall ever in GDP for New Zealand, StatsNZ said.

"This is despite fewer restrictions on domestic travel and business activity in the December 2020 quarter compared to previous quarters," it said.

"The decline in annual GDP is largely due to the effects of the alert level 4 national lockdown earlier in 2020."

New Zealand crashed into recession in the first half of 2020 before a record bounce with 14 per cent growth in the third September quarter.

"Activity in the December quarter showed a mixed picture," said StatsNZ national accounts senior manager Paul Pascoe.

"Some industries are down but others have held up or risen, despite the ongoing impact of Covid."

At the industry level, seven out of 16 industries declined. The two largest contributors to the drop were construction, and retail trade and accommodation. Both industries had strong September 2020 quarter results.

"Falls in construction services, commercial building, and infrastructure were partially offset by continued growth in residential building activity. Construction activity remains at historically high levels, despite this quarter's fall," Pascoe said.

Where there is emerging agreement is that the economy will basically track sideways from here until we make progress on opening borders.

"Our expectation is that 2021 is going to be a broadly sideways year for economic activity, as some industries struggle with capacity constraints and others remain suppressed on the back of the closed border," said ANZ's Miles Workman in his preview report.

Whether the fourth quarter of 2020 was marginally up or down wouldn't shift that view, he said.

"We know the recovery from lockdown has been impressive but that significant headwinds and uncertainty remains."