Economists warn New Zealand set for second recession

Despite the labour market recovery, experts say drop in tourism will take its toll on the economy

Economists warn New Zealand set for second recession

New Zealand is set to experience another recession this year due to the impact of closed international borders, analysts have warned.

Westpac’s economists have predicted that the country’s economy will shrink by 0.7% over the December and March quarters combined.

Despite surprisingly strong unemployment levels, the lack of tourists during peak holiday season will take a hit on the economy.

In the report, Westpac chief economist Dominick Stephens said the absence of visitors will be felt most keenly during the March quarter.

“With tourism out of action for now, economic growth over the next year will inevitably be driven by domestic forces, with household spending taking the lead,” the report said.

“New Zealand’s rapid bounceback from the Covid-19 lockdown helped to underpin employment and household incomes last year.

“At the same time, household spending patterns went through a significant shift. With overseas holidays off the table, spending was diverted towards household goods and home renovations, as well as in part an increase in saving.”

Read more: Calls for minimum wage boost to kickstart NZ economy

In December, the unemployment rate dropped to 4.9%, surprising forecasters who believed it would be much higher.

It now sits less than a percentage point from pre-Covid levels, but analysts say going forward, it is likely to remain flat or begin to rise.

While certain industries like tourism and hospitality have suffered, it has been outweighed by growth in other industries, including government spending in health, education and public services.

The construction industry has also seen a significant boom in demand as workers in other sectors switch careers to capitalise on the jobs.

With mortgage rates at record lows, the housing market is seeing a jump in activity.

“House prices are now screaming higher, with a 9% increase in the last three months of 2020 alone,” the report said.

“Our analysis has long shown that financial factors, and in particular interest rates, are by far the biggest driver of house prices.

“We’re forecasting a further 17% rise in house prices over this year – a very strong pace compared to history, but implicitly a slowdown from the current monthly pace.”

Read more: How significant is the 'gig economy' in NZ?

These figures indicate that the construction sector will continue to be a source of jobs over the next 12 months.

Elsewhere, the HR and legal industries have experienced the biggest bounce back in terms of job ads, according to new research.

The data released by Seek shows that between September and November 2020, adverts for property law roles increased by 130%.

Recruitment positions rose by 116% and positions for kitchen and sandwich hands increased by 114%.

Roman Rogers, regional general manager – New Zealand at recruitment agency Hudson, said the bounce back depends on the level of exposure at the peak of the crisis.

“Most roles associated with technology, for instance, have remained reasonably consistent because businesses invested in new ways of operating since the lockdown,” he said.

“The job market on the whole is growing steadily, but the more dramatic bounce back will be from the industries that were hit the hardest.”

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