The economy is expected to perk up this year on the back of strong commodity prices and a busy construction sector, but it will feel the pinch from reduced migration, and cooling in the housing market.
Photo: 123RF
Westpac Bank's quarterly overview expects the economy to take time to recover to pre-Covid-19 levels as vaccine programmes are rolled out, with the recovery likely to be uneven.
"With continued support from monetary and fiscal policy, we expect domestic economic activity will continue to firm through the back half of 2021 and into 2022," acting chief economist Michael Gordon said.
The domestic economy has been sustained by solid household spending, construction, and lower than expected unemployment, while demand for key agricultural products is expected to continue and underpin a strong export performance.
But Westpac also noted the sharp fall in migration caused by closed borders would reduce demand as well as no longer provide a source of labour.
"That signals a huge reduction in the economy's underlying growth rate and is a key reason why we expect GDP (gross domestic product) will linger below its pre-Covid trend for an extended period."
The bank is forecasting annual average growth touching 4 percent in the next couple of years.
The property market is expected to level out this year and house prices might fall between 3 and 4 percent over the following two years.
House prices may fall by up to 4 percent over the next two years, Westpac Bank's quarterly overview predicts. (file pic) Photo: 123RF
However, the strengthening activity is also expected to underpin a rise in inflation, which in due course would lead to higher interest rates.
"Concerns about inflation are running high, but we see this as a temporary spike. By next year, inflation should settle at a more moderate pace as the economy's spare capacity is gradually absorbed.
"We don't expect the Reserve Bank to increase the OCR [official cash rate] until early 2024, although financial conditions will already have tightened between now and then," Gordon said.
The global economy was also expected to do better, notably the United States and China, which bodes well for New Zealand exports.
Gordon said it was clear that governments around the world were using the pandemic as a catalyst for significant economic changes.
"In New Zealand, policy changes are now being rolled out that will reshape key parts of the economy over the coming years. This includes the property market, employment relations, climate change, healthcare, resource management and immigration, with no doubt more to come.
"This direction of change won't always sit easily with private industries that are drawing their own post-Covid lessons," Gordon said.