New Zealand: Economy contracts at sharpest pace on record in Q2 due to strict lockdown
September 17, 2020
The economy nosedived 12.2% in seasonally-adjusted quarter-on-quarter terms in the second quarter of 2020, following the first quarter’s 1.4% decrease. The reading marked the most pronounced contraction on record, and broadly matched expectations of a 12.8% plunge. Meanwhile, on a year-on-year basis, the economy plummeted 12.4% in Q2, accelerating from Q1’s 0.1% dip and also marking the worst contraction on record.
Q2’s sour quarter-on-quarter reading was due to the strict containment measures deployed to contain the spread of Covid-19, which drove a sharp downturn in domestic demand. Household spending dived 12.1% (Q1: -0.4% s.a. qoq), as abysmal consumer confidence, lockdowns and downbeat economic prospects prompted households to postpone purchases and increase precautionary savings. The drop in consumer spending on long-lasting products, accommodation and air travel was particularly pronounced. Moreover, fixed investment crashed 20.8% (Q1: -3.3% s.a. qoq), dragged down by falling investment in transport equipment and residential and non-residential buildings due to business shutdowns. However, public spending strengthened in Q2 (Q2: +1.7% s.a. qoq; Q1: +0.7% s.a. qoq).
In contrast, the external sector strengthened, although this was on the back of tumbling imports. Exports of goods and services fell 15.8% in Q2, following a 1.5% decrease in Q1, mainly down to plummeting sales of travel and transport services as New Zealand closed its border and travel restrictions were imposed around the world. Meanwhile, imports of goods and services dived a sharper 24.6%, after dropping 5.7% in Q1, hammered by vanishing investment activity and slumping purchases of intermediate and capital goods.
The economy will shrink considerably this year, as the coronavirus pandemic and its associated lockdown measures take their toll. That said, countercyclical fiscal and monetary policy should help to cushion the downturn to some extent and help recovery into 2021. Further waves of the virus pose a key risk ahead.