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New Zealand at risk of double-dip recession as Covid-19 recovery stalls

New Zealand’s economy contracted in the final quarter of 2020, denting the Pacific nation’s swift recovery from Covid-19 and raising the prospect of a double-dip recession.

Figures published on Thursday showed that New Zealand’s international border closure hit the tourism sector hard, reducing retail sales and hotel bookings. Construction activity slowed in the quarter to December, a result that followed a record expansion in the previous three months after one of the world’s toughest Covid-19 lockdowns was lifted.

Overall economic activity dropped 1 per cent compared to the previous quarter, well below consensus forecasts for a modest 0.2 per cent rise in gross domestic product. On an annual basis, GDP remains 0.9 per cent below the levels seen in December 2019.

Economists said the disappointing data highlighted the uneven nature of the recovery, which was a result of remaining Covid-19 restrictions. The important tourism sector, for instance, was particularly badly hit by an absence of international travellers in peak season.

Most commentators forecast New Zealand is heading towards a technical recession — two consecutive quarters of contraction — as its economy readjusts following a record 13.9 per cent rebound in growth in the third quarter of 2020.

“The solid decline in activity in Q4 means that a second recession is imminent as gross domestic product is bound to decline in the first quarter,” said Ben Udy, economist at Capital Economics.

However, Udy forecast a 5 per cent rise in GDP during 2021 with the economy buoyed by the vaccine rollout and lower risk of Covid-19 lockdowns.

Political analysts said New Zealand’s potential slide into a double-dip recession would be a challenge for Jacinda Ardern’s government, which has benefited from strong support owing to its adept handling of the pandemic.

“A recession is always a worry for government, even one that maintains public support for its Covid-19 strategy,” said Grant Duncan, associate professor at Massey University in Auckland.

“The government has its work cut out to deliver the vaccine rollout and lead an economic recovery. If it can do this well, then there will be no long-term risk to its popularity,” he said.

Grant Robertson, New Zealand finance minister, said it was unsurprising that growth figures were “jumping around” because of Covid-19 restrictions, but pointed out that construction activity remained at historically high levels, even though building activity declined in the fourth quarter.

“New Zealand had an extremely strong bounceback in the September quarter and some of that has evened out in the December quarter,” said Robertson.

Cameron Bagrie, founder of Bagrie Economics, said the economy remained slightly smaller than it was before Covid-19 struck and was probably already entering recession.

“The economy spring-boarded out of lockdown and pent-up demand was unleashed in the September quarter. The December quarter showed some pullback from that fillip,” he said. 

“Data is now showing a settling down trend along with the impact of border controls really hitting sectors such as tourism.”

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