The trusted voice of the industry
for more than 30 years

Economy tipped to rise from ‘sharp shock’

Institute predicts inflation pressures will intensify and interest rates will soon start rising.
Posted on 01 September, 2021
Economy tipped to rise from ‘sharp shock’

Experts are confident the New Zealand economy will again show its resilience once the Covid-19 lockdown that brought its “robust recovery” to a halt is over.

The New Zealand Institute of Economic Research says the outbreak of the delta variant of the virus in the community has changed the near-term outlook for business but it remains optimistic about the long term.

Christina Leung, principal economist, says economic activity has again dropped sharply with most of New Zealand sent home after alert level four was introduced for the whole country from August 17.

“The latest outbreak and containment measures will slow the New Zealand economy in the near term,” she adds. 

“However, the events of the past year have shown us that the New Zealand economy is resilient and responsive to fiscal and monetary policy stimulus. 

“The quicker community transmission is contained, and New Zealand moves down the alert levels, the shorter this sharp shock to the economy will be”.

In NZIER’s latest quarterly predictions report, she notes the current outbreak will likely see supply constraints become more acute, reflecting the reduction in the workforce as affected staff self-isolate and social distancing restrictions reduce the operating capacity of businesses.

Leung, pictured, adds even before this latest outbreak, businesses had found it difficult to hire staff and source inventory for production and to restock shelves. 

“These supply constraints will only get worse. What is not as clear is the longer-term impact on demand, which will be a key influence on how persistent inflation pressures turn out to be. 

“The strong bounce-back in activity over the past year suggests the New Zealand economy is resilient and that businesses will be able to pass on higher costs by raising prices.”

She predicts inflation pressures are likely to intensify and in turn the Reserve Bank is likely to press on with raising interest rates, starting with an increase in the official cash rate in October.

“Barring a prolonged outbreak where severe restrictions remain in place for New Zealand, which starts to have a longer-term negative impact on demand, interest rate rises are likely over the coming year,” Leung says. 

“Beyond this near-term uncertainty, interest rates will be rising over the coming years.”