NZ’s Economic Outlook Astounding and Enviable

The New Zealand economy has entered 2021 on a strong footing, having dodged a missile last year from COVID-19, according to Infometrics’ latest forecasts. The massive fiscal and monetary stimulus put in place last year, combined with our good public health outcomes, has limited the number of job losses, boosted the housing market and construction activity, and underpinned a strong rebound in economic activity after lockdown.

“The labour market’s performance is nothing short of remarkable,” says Infometrics Chief Forecaster Gareth Kiernan.

“This week’s data, showing the unemployment rate falling to 4.9% and job numbers down just 9,000 from their pre-COVID level, underpin a robust financial position for most households. Prospects for solid spending this year will feed through into increased optimism among businesses about their future activity levels.”

Infometrics expects GDP growth to accelerate to 4.6%pa in the second half of 2021 as the economy continues to shrug off the effects of last year’s lockdown. There will still be some constraints on activity as the borders remain shut and international economies continue to be affected by COVID-19. However, the uncertainty associated with these factors should decrease as the year progresses and vaccines are rolled out both here and overseas.

One of the key factors behind the improved growth outlook is the rampant housing market and its flow-on effects for construction activity. The reintroduction of loan-to-value restrictions is likely to drag house price inflation back into single digits by the end of this year, but Infometrics forecasts that house prices will continue rising throughout the next 24 months. Further interest rate cuts and any other monetary stimulus are now off the table.

The combination of an improved economic outlook and soaring house prices will intensify pressure to address the housing crisis. Strong government action is needed to ensure more equitable housing outcomes in the future.

Medium-term growth prospects for New Zealand shape as being more challenging, with average GDP growth predicted to be below 2%pa in the mid-2020s.

“International tourism is unlikely to fully recover within the next four years, and the overvalued housing market could also weigh on construction activity and economic growth further out,” said Kiernan.

“There will also be a need for significant fiscal restraint following last year’s spend-up. But New Zealand’s current prospects are astounding compared with projections from nine months ago, as well as being enviable in the context of the ongoing international battle with COVID-19.”