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GDP 2020: forecasts and realities

Although the third-quarter results were reported today (17th December), the impressive rebound is unsurprising. Historically, economists have used leading and lagging indicators to forecast and analyse economic developments. Leading indicators are used to forecast future economic growth or decline. Lagging signs confirm existing patterns

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While improved business and consumer confidence and expenditure (leading indicators) may indicate an economy emerging from recession, unemployment (lagging indicator) may still be low due to the time required for this to be reflected in economic numbers

A examination of some of New Zealand's leading and trailing indicators indicates that the country has fared surprisingly well in the aftermath of the economic crisis, with many measures outperforming historical averages. However, numerous obstacles remain, including a faltering global economy and national supply shortages caused by the ripple effects of other countries' lockdowns and transportation capacity limits

Prominent Indicators

Consumer expenditures

Retail, lodging, and restaurant activity increased by a record 42.8 percent in the second quarter, and current retail sales volume estimates indicate that this trend will continue in the third quarter (retail alone shows growth of 28 percent from June quarter levels)

Business services increased 8.4%, renting, hiring, and real estate increased by 5%, and arts, recreation, and related services increased by 26.8%. The speedy rebound is believed to be facilitated by wage subsidies, pent-up demand, and the fact that more Kiwis have vacationed in New Zealand than abroad. It is unknown whether this level of spending can be sustained

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Confidence among consumers and businesses

Consumer and corporate confidence polls are closely monitored — though extensively contested — as leading predictors of the economy's future success
While the latest ANZ business outlook poll remains negative at -6.9

November saw the highest level of confidence since late 2017!

While company confidence has rebounded unexpectedly, consumers are becoming more cautious, particularly about future inflation. The ANZ-Roy Morgan Consumer Confidence Index declined two points in November and is now much lower than levels seen in 2019

The stock exchange

The stock market is a very visible early indicator of the state of the economy. Because stock markets are partially based on predicted earnings, they can provide insight into the economy's future trajectory, although they are subject to manipulation by speculators

Following a sharp decline at the end of March, the New Zealand share market has recovered impressively, with the NZX 50 reaching an all-time high of 12855.02 in November 2020

Manufacturing and service-related businesses

Increased industrial activity implies a greater demand for consumer goods (especially if retail sales are also expanding) and may therefore portend future job growth

Construction increased by 52.4 percent, manufacturing increased by 17.2 percent, and electricity, gas, water, and waste services increased by 5.6 percent, indicating that the goods-producing industries are recovering. This is supported by the Manufacturing Performance Index (PMI). The PMI fell marginally in October but rebounded to 55.3 in November, up from 52.4 in October. A figure more than 50 indicates expansion, and the current reading is greater than the long-term average of 53.2

Meanwhile, the Performance of Services Index (PSI) decreased to 46.7 in November from 50.1 in October. The current score is lower than the historical average of 54.0, implying that the service sector's recovery will take longer

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Permits for construction

An increase in the number of building permits issued suggests an increase in construction activity
In September 2020, New Zealand's new home building consents increased by 3.5 percent over the previous year. In Auckland, the value of monthly construction consents awarded exceeded $1 billion, a record high

Prices of houses

Declining house prices may suggest that supply exceeds demand for housing or that current housing costs are unaffordable. House prices have a significant impact on the economy because they affect the wealth and consumption patterns of homeowners

To virtually everyone's astonishment, housing prices in New Zealand increased 20% year on year in 2020. Indeed, the rate of increase has been so rapid that the government has requested the central bank to explore expanding their mandate beyond price stability and employment to include housing price stability. This also reduces the likelihood that the RBNZ will cut interest rates to zero next year, as previously projected

Despite this, the latest ASB Housing Confidence Survey indicates that Kiwis expect house prices to continue climbing

Indicators That Are Late

GDP

GDP is a lagging indicator and one of the primary indicators used to assess an economy's health. As noted in the opening, the June quarter experienced a record loss of 12.2 percent. By comparison, New Zealand's GDP is predicted to have fallen 7.1 percent the following year during the Great Depression of 1932. Our leading indicators indicate a significant growth, which has been confirmed by the September quarter GDP number of +14%

Unemployment

The unemployment rate is a critical indicator of the economy's health. It typically increases dramatically during a recession and takes months, if not years, to return to pre-crisis levels. It does have some limits, as it only includes persons who are actively seeking job and does not include part-time workers. As a result, many argue that underutilization is a more accurate indicator of the labour market

The unemployment rate increased from 4% to 5.3 percent in the third quarter of 2020, the largest quarterly increase on record. It falls far short of the 8% projected by Treasury earlier this year. This favourable outcome has been attributed to the $13.9 billion in COVID-related wage subsidies and the precipitous decline in immigration caused by the border restrictions

However, unemployment typically increases after recessions are technically over, and the majority of pundits anticipate unemployment to reach between 6.5 and 7.5 percent in 2021

In the September quarter, the underutilization rate was 13.2 percent. This is lower than the record of 14.7 percent in 2012, but it may yet climb further in 2020
Inflation Index for Consumers

The CPI is often regarded as one of the most accurate gauges of inflation. Retail sales are used to track the revenue and inventory of firms that sell consumer and personal goods and services. They are critical because they have a direct impact on GDP. Slow retail sales indicate that businesses will recruit fewer staff, allowing them to sell and make less merchandise

Inflation, on the other hand, has been running far below the Reserve Bank's goal range even before the outbreak

According to Statistics New Zealand, the CPI increased by 1.4% in the year to September 2020. Quarterly increase was 0.7 percent, following a 0.5 percent decline in the June quarter. Food and housing were the primary drivers of price inflation

In general, New Zealand's economic indicators indicate a strong resurgence, which is consistent with what we are witnessing at GDPLive. GDPLive, which is often a trailing indicator, forecasts GDP in real time. Our predictions currently imply that the economy has recovered from its mid-year slump to show an annual decrease of 3.5 percent. While there is still a long way to go before the economy returns to normal output levels, practically all indications are pointing in the right direction as we approach the end of 2020

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