In February 2020 the first confirmed case of Covid-19 arrived in New Zealand. Identified only as “a person in their 60s recently returned from Iran”, it marked the beginning of an extraordinary period in the life of this country.
On 11 March 2020, the World Health Organisation declared Covid-19 to be a global pandemic.
Governments across the globe imposed strict lockdowns to slow the spread of Covid-19. In a nationwide address, Prime Minister Jacinda Ardern announced the country was moving to level 2 of a new four-level alert system.
As the number of confirmed cases increased, Ardern announced on March 22 that the country was moving to alert level 3, and then in 48 hours to level 4.
On March 22, the Minister of Civil Defence declared a State of National Emergency. New Zealand began its preliminary month-long lockdown on March 26, 2020.
Growth in the first three quarters
Gross Domestic Product fell by a record 11 per cent in the June quarter of 2020 as lockdown and public health measures were implemented in late March, followed by record growth of 14 per cent in the September quarter as the stringency of public health measures was relaxed.
The recovery was also reflected in 12-month growth figures, which improved from -11.3 per cent in the year ending June, to 0.4 per cent in the year ending September. New Zealand’s response has facilitated a V-shaped recovery.
Growth in household consumption was directly associated with economic growth. Domestic demand recovered strongly in the second half of 2020. Household consumption increased 14.8 per cent in the September quarter, following the record fall of 12.1 per cent in the June quarter.
This resurgence partially reflected pent-up demand from New Zealand’s periods at alert levels 3 and 4. Easing of Covid-19 restrictions and growing confidence in public health outcomes increased household spending across all of New Zealand.
In addition to the increases in domestic demand, the demand for New Zealand goods also increased. It is particularly important to note the growth of the Chinese economy in 2020. China was the only major country recording positive growth in the second quarter of 2020. Its economic growth continued in the third and the fourth quarters of 2020.
New Zealand’s latest Reserve Bank Monetary Policy Statement, in February 2021, emphasised this. “The rebound in the Chinese economy has supported demand for New Zealand’s export commodities – especially dairy,” it noted.
Is additional stimulus needed?
On March 17, 2020, Finance Minister Grant Robertson outlined a $12.1 billion package to support New Zealanders, representing 4 per cent of GDP. This initial package included a boost for health, wage subsidies, leave and self-isolation support, and more.
As the situation changed, the package was expanded. In the Budget, the Government established the $50b Covid-19 Response and Recovery Fund. In August 2020, another round of the wage subsidy was announced. According to the Treasury, as at February 1 this year, $10.2b of the Recovery Fund remains unallocated. The remaining balance is set aside for any future health and economic response needed in the case of a further Covid-19 resurgence.
In addition to the fiscal support, monetary policy has also been accommodative. On March 16, 2020, the Reserve Bank reduced the Official Cash Rate (the interest rate set by the Reserve Bank to influence economic activity and inflation) from 1 percent to 0.25 percent.
Two months later the Monetary Policy Committee agreed to significantly expand the Large Scale Asset Purchase programme potential to $60b, up from the previous $33b limit. Then in August, it agreed to further expand the programme to $100b.
New Zealand’s suppression of the virus and macro-policy response have been praised by international organisations. Credit ratings agency Standard & Poor’s raised the country’s local currency credit rating to AAA with a stable outlook in February 2021. This followed Fitch reaffirming its AA+ rating in January 2021.
An IMF report this month praises the direct support measures: “The size and scope of economic policy support have been unprecedented and helped avert a much larger decline in economic activity and employment.”
It argues that additional stimulus is not currently needed. The Reserve Bank shares the IMF’s view, saying “the recent resilience in the domestic economy implies that no significant additional stimulus is required at this time”.
This does not mean that the fiscal and monetary support should be withdrawn prematurely.
The Team of Five Million survived 2020 with collective responsibility and commitment. However, the challenge is out there. Significant global health and economic risks remain for economic recovery.
Last year showed us that New Zealand can overcome big challenges with collective responsibility and commitment to support Aotearoa. We will work together, and we will be better together.
