New Zealand’s economy faced significant challenges in the past year, with HSBC estimating that the country experienced the most substantial decline in gross domestic product (GDP) among developed nations. Additionally, The Economist ranked New Zealand just ahead of Finland, Latvia, Turkey, and Estonia based on economic indicators such as stock market performance, inflation, unemployment, and government deficits. Various factors, including the government’s response to the COVID-19 pandemic and subsequent monetary policies, have contributed to the severity of this economic downturn.
The Role of COVID-19 Stimulus and Its Aftermath
One of the primary contributors to New Zealand’s economic struggles has been the government’s extensive financial response to the COVID-19 pandemic. The government allocated approximately $60 billion through the COVID-19 Response and Recovery Fund, with $12 billion directed toward wage subsidies. According to Simplicity’s chief economist, Shamubeel Eaqub, the scale of New Zealand’s fiscal stimulus was significant compared to other nations.
During the pandemic, businesses received substantial financial support, leading to increased profitability and minimal job losses. The Reserve Bank of New Zealand (RBNZ) slashed interest rates and eased lending regulations, resulting in a short-term economic boost. However, once the stimulus was withdrawn, the economy faced a sharp contraction. Stringent monetary policies and the abrupt reduction in government support contributed to the ongoing economic difficulties.
The Impact of Monetary Policy on Inflation and Growth
The aggressive fiscal response initially stimulated economic activity but also led to rising inflation. To combat this, the Reserve Bank of New Zealand (RBNZ) implemented rapid interest rate hikes, surpassing those seen in many other countries. This approach was intended to curb inflation by slowing economic growth, even at the cost of a potential recession.
In contrast, Australia adopted a more cautious strategy. Westpac’s chief economist, Kelly Eckhold noted that the Reserve Bank of Australia was more lenient in addressing inflation, choosing to prioritize labour market stability. Unlike New Zealand, Australia’s central bank maintained an employment mandate, which allowed for a more gradual approach to monetary tightening. Similarly, the U.S. Federal Reserve has balanced inflation control with employment concerns, making it more inclined to adjust interest rates accordingly.
Eaqub criticized the RBNZ’s approach, arguing that the central bank maintained a restrictive monetary policy despite clear signs of economic distress. He pointed out that the official cash rate (OCR) remained elevated, with the RBNZ justifying this by citing neutral levels between 2.5 and 3 percent. He argued that this restrictive stance prolonged economic difficulties, particularly given the sharp decline in the housing market and the downturn in construction activities, which have left many New Zealanders feeling financially strained.
The Influence of Government Fiscal Policy and Economic Contraction
Beyond monetary policy, the government’s reduction in spending further exacerbated economic pressures. Public sector cutbacks added to the financial strain on businesses and households, limiting economic growth. Although these policies aimed to restore fiscal balance, they also contributed to the economy’s sluggish performance.
However, some improvements are anticipated. Eckhold highlighted that the Reserve Bank has initiated a series of interest rate reductions, totaling 125 basis points thus far, with expectations of additional cuts in the near future. He suggested that these measures could lead to improved economic growth, although he cautioned against overly optimistic forecasts. While interest rates are decreasing, they have not yet reached levels that would provide strong economic stimulus. Furthermore, fiscal policy is expected to remain relatively tight, limiting the extent of any recovery.
Prospects for Economic Recovery and External Challenges
Despite the economic downturn, some indicators suggest that conditions may be stabilizing. Eaqub noted that job losses have been less severe compared to past recessions. Additionally, job advertisements have ceased their rapid decline, indicating a potential rebound in the
some of the economic challenges.
Nevertheless, external factors could still pose risks to New Zealand’s recovery. China’s weaker economic performance could hinder New Zealand’s export-driven sectors, as China remains the country’s largest trading partner. Additionally, potential trade barriers imposed by a renewed administration under U.S. President Donald Trump could create further economic uncertainty.
Gareth Kiernan, chief forecaster at Infometrics, emphasized that multiple factors have shaped New Zealand’s economic trajectory beyond fiscal and monetary policies. These include COVID-19 restrictions, border closures, household debt levels, migration patterns, export prices, and population growth trends.
New Zealand’s economic challenges can largely be attributed to the government’s expansive COVID-19 stimulus, followed by a swift withdrawal of financial support and restrictive monetary policies. While some signs of recovery are emerging, continued policy adjustments and external economic conditions will play a crucial role in determining the pace of improvement.
