The New Zealand economy recovered quickly from the COVID-19 shock thanks to effective virus containment, measures to protect jobs and incomes and highly expansionary macroeconomic policies but is now overheating and house prices have soared. The Reserve Bank has begun to tighten monetary and macroprudential policies with a view to achieving its price and ﬁnancial stability objectives. Together with policy measures to increase housing supply, this should help moderate housing price inﬂation. While the ﬁscal deﬁcit has begun to fall from the highs reached during the ﬁrst wave of the COVID-19 shock, additional consolidation measures will be needed to put public ﬁnances on a sustainable path, including an increase in the pension eligibility age.
Economic growth should reach 4.7% in 2021, reflecting the bounce-back from the disruption caused by the pandemic, but will slow to 3.9% in 2022 and 2.5% in 2023 as macroeconomic policies tighten and capacity constraints are alleviated only gradually after the border begins to re-open in early 2022. Inflationary pressure will remain strong, as the economy continues to run above capacity and the labour market remains very tight, boosting wages. Growth may slow more markedly if vaccination delays among some population groups were to push back border re-opening.
The economy recovered strongly, supported by large policy stimulus and an effective response to COVID-19, but some sectors hardest hit by border restrictions, notably tourism, lag behind. The pandemic highlighted a number of structural challenges. A key priority is to address the deteriorating access to affordable housing, which weakens financial resilience, hampers labour mobility and reduces inclusiveness.
©Shutterstock/Anton PetrusRead full country note
2021 Structural Reform Priorities