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Unprecedented stimulus supports V-shaped recovery for the New Zealand economy - NZIER

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Fuseworks Media
Fuseworks Media

NZIER Quarterly Predictions, December 2020

Unprecedented stimulus supports a V-shaped recovery for the New Zealand economy

Recent developments point to a strong rebound in economic activity, as the New Zealand economy responds to the unprecedented amount of stimulus measures implemented by the Government and Reserve Bank. NZIER forecasts annual average GDP growth to rise to around 5 percent by early 2022, before moderating to average around 3 percent in the subsequent years.

A recovery in the household sector and increased demand for food commodity exports drive this rebound in economic growth over the coming year. Record low mortgage rates have fuelled housing market activity, with retail spending picking up back to pre-COVID levels as people furnish their new homes. However, the increase does not offset the decline in spending experienced over the lockdown, and many businesses still face revenue loss for the 2020 year.

Nonetheless, businesses are feeling more positive. Buoyed by improved demand, businesses are looking to hire again, and once again starting to see a re-emergence of labour shortages. There are also signs of a turnaround in investment intentions, particularly in regard to plant and machinery. However, with banks more cautious about lending this will limit the extent of the rebound in investment in some areas such as commercial property.

Border restrictions will continue to have a severe impact on New Zealand services exports

With other countries continuing to grapple with the COVID-19 outbreak, we expect border restrictions will likely remain in place for much of 2021. This will continue to have a severe impact on New Zealand services exports, primarily tourism and international education.

On the flip side, the border restrictions also mean New Zealanders are unable to head overseas for holidays. This edition of Quarterly Predictions includes a special feature discussing where households may potentially spend their money that is not being spent on overseas holidays.

Stimulus leads to housing market side-effects

Record low mortgage rates have boosted housing demand and driven house prices to new record highs across most regions. Concerns about the risk rising house prices pose to financial stability prompted the Reserve Bank to announce the reintroduction of Loan to Value Ratio (LVR) restrictions in March next year - two months earlier than initially planned. The strength in the housing market has also reduced the likelihood the Reserve Bank will cut the OCR further. On balance, given the Reserve Bank’s ‘least regrets’ approach in bringing interest rates to extremely low levels to encourage spending and investment, we continue to expect it will introduce a negative OCR around mid-2021.

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.

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