New Zealand Institute of Economic Research (Inc) Media Release, 25 May 2021 For immediate release
While the dip in New Zealand economic activity in the final quarter of 2020 suggested some easing in the momentum of the rebound in the economy, improving household and business confidence should support a continued recovery over the coming years. Businesses are looking to invest and hire, and the improvement in household incomes is supporting retail spending.
Principal Economist Christina Leung says “With the risk of further lockdowns fading as the vaccine rollout progresses, households and businesses are feeling more confident about making plans for the year ahead. Continued fiscal and monetary policy support in the form of Government spending and low interest rates are also supporting demand”.
NZIER forecasts annual average GDP growth to pick up to around 5 percent by the end of this year, before moderating to just over 3.5 percent by 2025.
Supply-side constraints becoming more of a concern
Christina Leung notes that while the robust recovery in demand is encouraging, there are signs that supply constraints will hamper growth over the coming years. Supply chain disruptions because of the COVID-19 outbreak around the world and emerging labour shortages are affecting output across the sectors in New Zealand.
“From building sector firms trying to find materials and labour to carry out construction projects, to retailers looking to restock shelves and manufacturers sourcing inputs for production, these supply constraints are affecting the ability of businesses to meet demand. The Government has announced some major capital spending plans in Budget 2021, but with capacity pressures building up in the construction sector there is a risk the spending programme becomes more protracted.”
Rising inflation pressures drives turnaround in interest rate expectations
“The broadening of capacity constraints across the New Zealand economy is underpinning a lift in inflation pressures” says Leung.
“Focus has now turned to when the Reserve Bank will begin to tighten monetary policy. Although the pace of bond purchases by the central bank under its Large Scale Asset Purchase programme has slowed recently, we expect the Reserve Bank will be patient when it starts to raise interest rates given its least regrets approach. We continue to expect the Reserve Bank to leave the OCR on hold until 2024.”
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