NZ's economic resilience

Published April 13 2021

The New Zealand economy appears, on the whole, to be coping pretty well with the global pandemic’s uncertainties and disruptions, with production having bounced back to roughly pre-COVID-19 levels.

NZ’s vaccination program is understandably not front of the global queue, given it has no community transmission of the virus, but the rollout to border workers is well underway, which will reduce the risk of the virus escaping into the community and requiring further snap lockdowns.

The closed border has hit the economy hard, via tourism, foreign education and labour supply. The recently confirmed travel bubble with Australia represents a very welcome step back towards normality, but with a real risk of getting stranded on the wrong side of the ditch, it’s unclear whether tourists will have the same appetite to travel as previously.

But it’ll be a game-changer for Queenstown and its struggling tourism businesses. The impact on GDP is more nuanced, given New Zealanders will also fly off and spend money in Australia that they would have spent at home. But overall, 25 million Australians is a pretty significant captive audience, and ANZ Research expects the economy – and certainly morale – will get a boost.

In the meantime, a lot of the activity that has stepped up to fill the hole left by tourism involves more debt, which will have to be paid back one day. But the rapid bounce-back in the economy and the associated recovery in the labour market have gone a long way to allaying fears of a persistent lift in unemployment that could scar the prospects of both individuals and the economy as a whole.

Key

A key part of the resilience of the NZ economy, apart from the successful health response, has been the success of fiscal and monetary policy. The rapidly implemented wage subsidy was extremely expensive, but it was highly effective at keeping workers attached to their employers and seeing firms through the initial, lengthy lockdown required to eliminate COVID-19.

The fiscal burden since then has been smaller than feared as the economy has outperformed expectations. A large part of that story has been the remarkable impact of easier monetary policy on the economy and, in particular, on the housing market.

Defying widespread expectations of house price falls, the market has boomed in response to lower mortgage rates and the big increase in bank funding that resulted from the RBNZ’s money printing to fund its quantitative easing program.

House sales, prices and mortgage lending have skyrocketed. The level of house prices relative to household incomes has jumped sharply from what was already a record high.

The increase in paper wealth and construction activity that accompanies a housing boom has most certainly boosted economic activity.

The construction sector is a clear outlier in the ANZ Business Outlook survey in terms of its confidence, activity and employment intentions. But the stresses and strains are starting to show.

In the NZIER Quarterly Survey of Business Opinion, the building sector reported it had never been so stretched – this in data going back to the 1960s. And the contribution of construction to GDP at the end of last year was far lower than consents would have suggested.

Not only is labour running short; building materials are too, which anecdotally is causing significant delays for building projects large and small. Costs are escalating: the vast majority of businesses in the sector report higher costs, and a majority intend to raise their prices.

Risks

There are both upside and downside risks to ANZ Research’s view the economy will go broadly sideways in 2021.

On the upside the travel bubble could be embraced by Australians more enthusiastically than assumed. The US economy is set to boom and this could spill over into global activity and commodity prices more broadly. The New Zealand economy generally does pretty well in that environment, as do NZ’s commodity prices. And there are probably upside risks to fiscal policy, given the current fiscal position is much better than appeared likely a year ago.

On the downside, there are also risks around vaccine availability and effectiveness, as well as of global financial markets not coping well if the current increase in longer-term interest rates doesn’t run out of steam.

There are also upside risks purely to inflation – cost-driven increases that aren’t growth friendly, and which the RBNZ will be keen to look through, as long as inflation expectations remain well anchored (so far so good on that front).

Global shipping disruptions are causing shortages of an increasing range of goods, including some that are pretty important for construction, agriculture and manufacturing. Pricing intentions are at record highs in the ANZ Business Outlook survey, in data that goes back to 1992. But the RBNZ will be keen to kept monetary conditions easy for a long time yet, given the difficulties that would be posed by inflation slumping again when the Official Cash Rate is already so close to its limits.

All up, the NZ economy will face challenges in 2021 as some temporary supports fade and activity remains distorted, but it faces into those challenges in much better shape than many economies, after a year of abnormal normality.

Sharon Zollner is Chief Economist, NZ at ANZ

This story is an edited version of an ANZ Research note