New Zealand
Economic growth is projected to pick up gradually from the second half of 2021, boosted by the progressive reopening of the border, reaching 3.5% in 2021 and 3.8% in 2022. Private consumption will remain robust, supported by the recent minimum wage increase and the wealth effect from rising house prices. Investment will expand on the back of strong house prices, record high issuance of building permits and large public infrastructure projects gaining momentum. Inflation pressure will strengthen as economic slack disappears by end-2022.
The pace of vaccination needs to accelerate to reduce the risk of new outbreaks and pave the way for full border reopening in 2022. While the Wage Subsidy and other support schemes helped to preserve jobs, the government should now strengthen income support and training during job transitions to enhance reallocation of workers toward high-growth sectors. Housing supply must increase swiftly to curb excessive house price inflation and growth in household indebtedness.
New Zealand is starting to reopen its border
New Zealand remains almost free of COVID-19 thanks to strict border, isolation and quarantine arrangements, extensive testing, tracing and isolation procedures and pre-emptive restrictions on activities whenever cases of community transmission are found, as occurred in Auckland in February. On 19 April, the government removed quarantine requirements for Australian and New Zealand residents arriving from Australia and for other travellers who have stayed in Australia for at least 14 days, thereby reinstating quarantine-free travel between the two countries. The government is implementing a single-provider vaccination programme and has ordered enough doses to vaccinate the whole population aged 16 and over. As of 11 May, only 5% of the population had received a first dose and 2% a second dose.
Economic growth is stabilising while inflation is picking up
Following the huge bounce back in the third quarter that lifted economic activity to above the pre-pandemic level, economic growth has moderated to more sustainable rates. Exports have been weak mainly owing to the near absence of foreign tourists until recently. In contrast, private consumption has remained robust. The median house price increased by 24% between March 2020 and 2021, generating a strong wealth effect. Wage growth has been modest, reflecting residual labour market slack, but the 5.8% increase in the minimum wage in April 2021 is likely to increase the incomes of low-wage workers (earning less than 120% of the minimum wage), who constitute one-quarter of all workers. Very high food commodity prices and strong demand for New Zealand’s export goods by China have also supported household incomes. Electronic card spending slowed somewhat recently, partly owing to the short Auckland lockdown in February 2021. Core inflation edged up to almost 2% in the first quarter of 2021 on the back of strong demand, a surge in housing costs and supply-chain disruptions.
Expansionary macroeconomic policies are supporting the recovery
While fiscal spending related to the COVID-19 response package will be mostly phased out by mid-2021, “shovel-ready” infrastructure investment amounting to NZD 2.6 billion (1% of GDP) will be rolled out in 2021 and 2022. Other multi-year infrastructure projects are also in the pipeline, funded by the NZD 12 billion New Zealand Upgrade Programme. Expansionary monetary policy, with the official cash rate unchanged at 0.25% and abundant liquidity supplied through quantitative easing, has kept firms’ funding costs low (the average interest rate on outstanding business loans has declined by about 75 basis points since early 2020), but also boosted mortgage lending and house prices. In order to slow growth in lending for rental property purchases, which had been particularly high, the Reserve Bank of New Zealand announced in February 2021 that the loan-to-value ratio for property investors would be cut to 60% in May. To improve affordability for first-home buyers and damp investor demand for the existing housing stock, the government announced in March that interest tax deductibility for residential rental properties purchased after 27 March 2021 would be removed from 1 October 2021, while deductibility for properties purchased earlier would be phased out by 2025. Furthermore, the holding period during which all capital gains on rental properties are taxable would increase from five years currently to 10 years on property purchased after 27 March 2021. In February 2021, changes were made to the Reserve Bank Monetary Policy Committee’s remit, requiring it to take into account government policy relating to more sustainable house prices while working towards its objectives.
Economic growth will pick up as the border reopens
Economic growth will pick up, driven by robust domestic demand and a gradual recovery of tourism exports, which accounted for one-fifth of New Zealand’s exports before the pandemic. The border is assumed to open fully by early 2022. This will improve the business outlook in sectors like transport, stimulating hiring and investment. The unemployment rate is projected to edge down from 4.7% in early 2021 to 4.3% by end-2022. The main downside risk is that the full opening of the border is pushed back, for instance due to a significant delay in vaccination of the adult domestic population or the emergence of new COVID-19 variants that diminishes vaccination effectiveness. Another downside risk is that an unanticipated increase in interest rates and/or unemployment could have a large negative effect on private consumption owing to the high level of household debt (equivalent to 166% of household income at end-2020). However, stronger-than-foreseen global demand for New Zealand’s agricultural products may boost export growth more than projected.
Labour reallocation is needed to ensure an inclusive recovery
Absent an unexpected deterioration in the economic outlook, no further fiscal stimulus is required, although more generous income support for low-income households and larger spending on active labour market policy may be needed to achieve key well-being objectives, like child poverty reduction. While monetary policy should remain expansionary to support a broad-based recovery, some sectors may recover only slowly even after border reopening. Promoting the reallocation of workers in these sectors toward sectors experiencing high growth and labour shortages, such as construction, would make for a more inclusive recovery. This requires adequate income support during job transitions and abundant provision of re-training opportunities in partnership with companies. Housing supply needs to be boosted by removing construction bottlenecks, including the inability of local governments to finance the associated infrastructure investments. Increasing the supply of affordable housing is crucial for improving well-being, both by reducing housing costs and facilitating worker mobility to regions where high-growth sectors are located. Increasing support for investment in low-carbon technologies, the diffusion of electric vehicles and housing insulation together with investments to improve public transport, as planned, would help build back a better economy.