New Zealand’s 2021 Economic Outlook: What We Expected and What Happened

This article was originally published in January 2021, reflecting the economic outlook at that time. It is preserved as a record of what New Zealand’s recovery looked like from the inside.

The big picture

New Zealand entered 2021 in a COVID-19-driven recession. Two consecutive quarters of negative growth pulled Annual GDP to minus 2.2% for the year to September 2020 — the most significant annual decline on record.

But because of New Zealand’s early and decisive COVID-19 response, Championed by Jacinda Ardern, the predicted economic slump was shallower than feared. Stats NZ data showed the economy was up 0.4% from the prior year by September 2020, against market expectations of a 1.8% decline.

IBIS World predicted real GDP growth of 5.7% for 2021–22, alongside lower interest rates and declining unemployment, forecasts that proved broadly accurate.

The labour market

Infometrics had forecast unemployment climbing above 8% by end of 2020 and peaking at 9.7% during 2021. The government’s wage subsidy programme was ending and border restrictions remained in place, making these predictions feel plausible at the time.

Two countervailing forces were changing the workforce. First, a significant number of New Zealanders were Returning from overseas, boosting the skilled labour pool. Second, workers displaced during 2020 were retraining through free upskilling programmes, opening new opportunities in sectors that needed them most.

COVID-19 also proved that remote work was viable at scale. Geographical distance was no longer a constraint on hiring and businesses began adopting more flexible working arrangements, a shift that would become permanent for many.

Consumer and business confidence

Consumer sentiment had dropped during 2020 but was recovering by year’s end. IBIS expected consumer sentiment to increase by 7.5 index points in 2021–22, helped by low interest rates and rising household incomes. The ANZ-Roy Morgan Consumer Confidence Index rose 5 points to 112 in December 2020, not far off the historical average of 120.

Business confidence told a similar story. The ANZ Business Outlook Survey reached multi-year highs in December 2020 at 9.4%, up 16 points from the previous month. IBIS predicted a further 26.4 index-point increase in 2021–22. Tourism and hospitality were expected to lag, but overall, the direction was clearly upward.

In hindsight

The outlook at the start of 2021 proved largely correct: the economy recovered faster than most expected, unemployment peaked well below the worst forecasts and business confidence returned. What few predicted was the inflationary pressure and housing market overheating that would follow in 2022–23, consequences of the same low interest rates and government spending that fuelled the recovery.

For a look at the Businesses that adapted during this period, read our pandemic resilience stories.