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

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

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

Overall economic activity fell 1% from the previous quarter, well below consensus forecasts of a slight 0.2% increase in gross domestic product. On an annual basis, GDP remains 0.9% below the levels observed in December 2019.

Economists said the disappointing data underscored the unequal nature of the recovery, which resulted from the remaining restrictions of Covid-19. The important tourism sector, for example, has been particularly affected by the absence of international travelers in high season.

Most commentators predict New Zealand is heading into a technical recession – two straight quarters of contraction – as its economy readjusts after a record 13.9% rebound in growth in the third quarter of 2020.

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

However, Udy predicts a 5% increase in GDP in 2021 with an economy supported by vaccine rollout and a lower risk of Covid-19 lockdown.

Political analysts have said New Zealand’s potential slide into a double-dip recession will be a challenge for Jacinda Ardern’s government, which has enjoyed strong support due to its astute handling of the pandemic.

“A recession is always a concern 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 for it to roll out the vaccine and lead an economic recovery. If he can do that well, there will be no long term risk to his popularity, ”he said.

New Zealand Finance Minister Grant Robertson said it was no surprise that growth numbers ‘jump’ due to Covid-19 restrictions, but stressed construction activity remained at levels historically high, although construction activity declined in the fourth quarter.

“New Zealand had an extremely strong rebound in the September quarter and some of that rebound stabilized in the December quarter,” said Robertson.

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

“The economy came out of lockdown and pent-up demand was unleashed in the September quarter. The December quarter showed some decline from this boost, ”he said.

“The data now shows a stabilization trend as well as the impact of border controls which really affect sectors such as tourism.”

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