New Zealand’s economic recovery began promisingly in mid-2009, supported by unprecedented policy stimulus. The economy has benefited from growing trade linkages to China and other emerging markets in Asia, which suffered less from the international financial crisis and have rebounded more vigorously. Dairy and other food prices have surged as rising living standards in such populous markets have boosted demand, and droughts in producer nations, including New Zealand, have been more frequent. The country has likewise gained from its high degree of economic integration with a robust Australia. Even so, private domestic demand has failed to bounce back as quickly as in most previous recoveries, and little or no rebalancing has occurred. Growth lost momentum by the second half of 2010 as the global economy slowed and households and firms remained cautious with their spending. This, together with the impact of a strong earthquake that struck the Canterbury region in September 2010, contributed to stagnation in activity in the second half of the year. A second, more damaging earthquake in late February 2011, largely centred on Christchurch, New Zealand’s second largest city, will further retard the recovery in 2011 and makes the outlook highly uncertain. The Rugby World Cup will provide a temporary boost to growth in the second half of the year and high commodity prices will also provide support, but previously expected earthquake reconstruction will be delayed and household spending will probably remain subdued for longer. Reconstruction (officially estimated at 8% of GDP) is projected to get fully underway in 2012 and provide a substantial boost to demand over a number of years. At the same time private investment and consumption should start to recover more surely, though needed fiscal consolidation will start to bite.