As a financial adviser, I am frequently asked to explain what Gross Domestic Product (GDP) is, why it is important, and why maintaining a positive GDP is crucial.
Understanding GDP
GDP is a comprehensive measure of a country's economic performance. It represents the total monetary value of all goods and services produced within a nation's borders over a specific period, typically a quarter or a year.
The Importance of GDP
GDP is a vital tool for assessing economic performance. While it has limitations, its role in economic analysis and planning is indispensable. Here’s why GDP matters:
1. Indicator of Economic Health: the change in GDP indicates the overall health of an economy. A growing GDP suggests economic expansion and improving living standards, while a contracting GDP can signal economic distress. Recession is defined as two successive quarters of contracting GDP.
2. Policy Making: Politicians consider GDP data when formulating fiscal and monetary policies. It helps in making informed decisions on interest rates, government spending and taxation.
3. Driver for Investment Decisions: Investors use GDP growth rates to assess economic conditions and potential returns on investment. A healthy GDP can attract both domestic and foreign investments.
4. Standard of Living Measure: GDP per capita, calculated by dividing GDP by the population, is a proxy for the average standard of living. Higher GDP per capita generally indicates better living conditions and higher income levels.
Recent GDP Trends in New Zealand
In the March 2024 quarter, New Zealand's economy posted a modest recovery, emerging from a brief recession. GDP grew by 0.2%, reversing a 0.1% contraction in the December quarter, as reported by Statistics New Zealand. For the year ending March 2024, GDP grew by 0.2% compared to the previous year, indicating a slow but positive recovery.[i]
However, GDP per capita fell by 0.3% in the March 2024 quarter, marking the sixth consecutive quarterly decline. In fact, ‘there's never been anything this bad as far back as Statistics NZ reports’. This truly underlines the gravity of our present predicament.[ii]
This trend highlights ongoing challenges, such as population growth outpacing economic output, resulting in a decrease in the average economic well-being of New Zealanders.
Limitations and Criticisms of GDP
Despite its importance, GDP has been criticised for having limitations. Some politicians and economists argue that GDP is a blunt measure that fails to encompass a more compassionate view of economic health. Critics suggest that GDP does not account for non-market transactions, environmental degradation, income inequality, or the overall quality of life. However, many of these criticisms were issued during times of relative economic buoyancy, rather than contraction when the cost-of-living is a more pressing matter.
Economic Forecast and Policy Implications
The alignment of GDP data with the Reserve Bank of New Zealand’s (RBNZ) forecast indicates that the central bank's economic assessments and policy measures are on track. However, the modest growth may prompt policymakers to consider additional measures to stimulate the economy further. Given the mixed performance across industries and the prolonged decline in GDP per capita, there may be a need for targeted fiscal policies such as fully expensed capital expenditure, allowable until a fixed date, to support struggling sectors and our woeful intergenerational productivity. Unfortunately, the May budget had little for business or addressing productivity – both being referenced only five times throughout the Finance Minister’s budget speech.
Challenges and Opportunities
New Zealand's economy faces significant challenges. The mixed results at the industry level indicate that while some sectors are recovering, others continue to struggle with post-pandemic effects, supply chain disruptions, and chronic labour shortages. The ongoing decline in GDP per capita also poses a serious challenge for ensuring that economic growth translates into improved living standards for all citizens.
This underscores the fundamental importance of a robust and expanding economy in meeting the needs and aspirations of New Zealanders. Positive GDP growth ensures that the economy is generating sufficient resources to provide essential services, enhance infrastructure, and improve the overall quality of life. By growing the proverbial pie, we ensure that there are more resources available for everyone, allowing for better public services, higher wages, and improved living standards. This economic expansion is crucial for sustaining the services that Kiwis rely on and for achieving long-term prosperity.
GDP is inherently a backwards-looking measure, especially in New Zealand where we receive that data almost 3 months post-event. Other developed world nations produce their GDP data monthly. Sadly, as a result our decisions are often made based on stale data that is already several months old, akin to seeking directions from Google Maps to where you were located 3 months ago.
Anecdotal evidence suggests that the current quarter might be worse than the last and that we are in the eye of the storm. ‘Consumer confidence has slumped this year while businesses are increasingly pessimistic about sales and profits. The services sector — which makes up two thirds of GDP — is in its deepest contraction in nearly three years’.[iii]
This can potentially lead to a "double dip" recession with two negative quarters, one positive, followed by two more negative quarters.
For Investors
A burden shared is a burden halved. Seeking counsel from an independent financial adviser during times of economic volatility is beneficial. Global diversification is a key consideration as not all nations are experiencing the same challenges as we are at present. Investment decisions made on the hoof in challenging times can be expensive in reflection and very hard to unwind. The best approach is to sit down with a financial planner for a goal and objectives-based discussion, rather than focusing solely on short-term economic fluctuations. It's important to seek comprehensive advice that considers long-term financial health and aligns with personal goals, rather than reacting to token observations or managing money based on transient market conditions.
· Nick Stewart (Ngāi Tahu, Ngāti Huirapa, Ngāti Māmoe, Ngāti Waitaha) is a Financial Adviser and CEO at Stewart Group, a Hawke's Bay-based CEFEX & BCorp certified financial planning and advisory firm. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance & KiwiSaver scheme solutions. Article no. 361.
· The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from a Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.newshub.co.nz/home/money/2024/06/new-zealand-out-of-technical-recession-as-gdp-grows-in-latest-data.html
[ii] https://www.nzherald.co.nz/business/household-recession-18-months-old-with-no-end-in-sight-matthew-hooton/NATN5ZTX2FEIHCRU2H3KS7U7XQ/
[iii] https://www.bloomberg.com/news/articles/2024-06-17/new-zealand-economy-seen-exiting-recession-by-a-whisker?embedded-checkout=true
