NZ’s V-shaped recovery intact despite Valentine’s Day community case surprise - NZIER quarterly Predictions, March 2021

23 February 2021

New Zealand Institute of Economic Research (Inc)
Media Release, 23 February 2021
For immediate release

The announcement of new COVID-19 community cases on Valentine’s Day highlighted how quickly things can change for the New Zealand economy. The swift move of Auckland into Alert Level 3 was an unwelcome development for many services industry firms which had started to get activity back on track. Prior to this, activity in New Zealand was largely returning to normal, barring the effects of continued border restrictions which are having a severe negative impact on tourism-related industries.

Principal Economist Christina Leung says “whilst disruptive, the brevity of Alert Level 3 for Auckland and Alert Level 2 for the rest of the country means that the V-shaped recovery for New Zealand should remain. Construction demand is growing strongly after weakness over the first half of 2020, and we expect it will continue to lead the recovery over the coming years”.

The pipeline of construction is growing in response to the significant amount of stimulus injected into the economy by the Government and the Reserve Bank. Increased Government spending and lower interest rates have also supported a recovery in consumer confidence, with retail spending picking up as New Zealand moved down the alert levels.

NZIER forecasts annual average GDP growth to pick up to over 6 percent by the end of this year, before moderating to average around 3 percent in the subsequent years.

Vaccine rollout will influence how recovery evolves

Christina Leung notes that the recovery remains uneven, with continued border restrictions affecting New Zealand services exports, primarily tourism and international education. The recent community cases highlight the border being the weak link in our elimination of COVID-19.

“This means that the pace of the vaccine rollout, such that widespread herd immunity can be achieved, will be a key influence on when the New Zealand economy can return to normal with open borders. The Government has indicated that border restrictions will likely remain for the remainder of 2021. This will pose further challenges for the tourism-related industries.”

Stronger than expected recovery reduces the chances of a negative OCR

“There are signs of capacity pressures re-emerging in some parts of the New Zealand economy such as the construction sector. We expect this will lead to a further lift in underlying inflation pressures” says Leung.

“We now expect the Reserve Bank will have enough confidence that the current level of OCR will be sufficient to return annual CPI inflation to its 2 percent inflation target midpoint and achieve maximum employment over the coming years. We now expect the OCR to remain on hold through to 2024. While there remains a risk of a negative OCR over the coming year, over the longer term the risk is of a faster pace of tightening by the Reserve Bank.”

Quarterly Predictions is an independent review of New Zealand’s economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER’s members.

For further information, please contact:
Christina Leung, Principal Economist & Head of Membership Services, 021 992 985

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