The third quarter of 2020 saw New Zealand’s economy staging a phenomenal economic turnaround, snapping convincingly out of the recession, triggered by the level 4 Covid-19 lockdown in the country.

Although the same cannot be said about the fourth quarter. The NZ economic recovery seemingly faced a major setback, courtesy of the second lockdown announced in Auckland in August, which extended well into October.

The South Pacific nation’s GDP rate is expected to fall sharply to 0.1% QoQ in the three months to December vs. a 14% rebound seen in the third quarter of 2020. On an annualized basis, the economy is likely to have expanded 0.5% in Q4 vs. a 0.4% growth recorded in the previous quarter.

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NZ economy is not out of the woods yet

New Zealand is actually holding up quite well in relation to many of the developed nations but a mixed bag of economic indicators reflects a slowdown in the economic recovery in the final quarter of 2020.

Its recovery remains quite patchy amid a lack of overseas tourists over summer and a slump in consumer spending. The OZ economy’s Q4 Retail Sales contracted by 2.7% QoQ in Q4 versus a massive 28.0% jump reported in the previous period. The NZ CPI rose 0.5% in the December quarter when compared to the September quarter’s 0.7% increase.

Meanwhile, the McDermott Miller Consumer Confidence Survey by Westpac for the December quarter showed sentiment rose nearly 11 points to 106, the highest level this year. Note that it had slumped to its worst reading since 2008 in the three months to September.

Further posing downside risks to the NZ GDP rate, the Chinese economy sees an uneven post-pandemic recovery, as the manufacturing sector upturn loses traction.

The NZ Q4 GDP report is likely to highlight the macroeconomic divergence between the two Antipodean economies, especially after Australian Q4 GDP outpaced expectations, prompting economists to raise the 2021 GDP forecasts.

Upbeat GDP to save the day for NZD bulls? 

NZD/USD remains confined within Monday’s trading between 0.7217 and 0.7158 so far this week. Markets refrain from placing any directional bets in the lead-up to US Federal Reserve (Fed) monetary policy decision and the NZ Q4 GDP release, both due on the cards this Wednesday.

The FOMC outcome-induced risk sentiment will likely emerge as the key catalyst behind the kiwi’s price action. Therefore, the NZ dollar could show a limited reaction to the GDP report.

The Fed is widely expected to maintain its monetary policy settings but the economic projections and dot plot chart will be closely eyed. Investors wait to see if Fed Chair Jerome Powell signals a faster path toward policy normalization than previously expected, in the face of rising inflation risks.

Only a big beat on the NZ GDP figures could put a floor under NZD/USD, which could power the kiwi bulls towards March highs just above the 0.7300 level. A dovish Fed along with a downbeat GDP reading could help the spot to extend its decline towards 0.7100.