RaboResearch - Economic Research

New Zealand: Two sides of the same coin


  • Short-term implications of the current Omicron peak are increased staff shortages and lower hours worked, leading to extra supply challenges and lower consumption
  • Nonetheless, the economic impact will mostly be concentrated in Q1. In this scenario the GDP will grow 3.2% in 2022
  • In the first half of the year, the New Zealand economy will likely benefit from a strong rebound from the pandemic on the back of the end of Covid restrictions
  • In the second half of the year, NZ will feel the brunt of its own success through higher prices and a deterioration of purchasing power, which constrains economic growth
  • The solid economic recovery and price effect resulting from supply disruptions caused by the conflict in Ukraine will most likely lead to elevated inflation
  • As such, the recovery is likely to be not as strong as it looks at face value
  • The RBNZ is clear that “more tightening is needed,” which will further erode demand over the course of 2022
  • The outlook for trade is relatively positive as the reopening of borders allows service exports to recover and global economic recovery leads to a global increase in demand
  • Downside risks are related to new variants of Covid-19, further escalation of the war in Ukraine, and a slowdown in global economic growth

War is raging in Ukraine. Kiev is more than 17,000 kilometers away from New Zealand. Still, the physical distance doesn’t make New Zealand immune to the effects of this conflict. At the time of writing much remains unclear with regard to the broader implications of the conflict. Therefore, this publication mainly focuses on the economy of New Zealand in a broad sense, although we’ve also included a paragraph on the Russia-Ukraine conflict’s potential effect on New Zealand at the end of the publication.

Come Back for Good

Domestically, New Zealand is in the midst of its campaign against Covid-19. The country has been quite successful in preventing a high number of infections and fatalities from the Covid-19 virus. With only 188,600 total local cases and 63 Covid-19-related fatalities, New Zealand is one of the least impacted countries from a health perspective globally. However, the very strict government lockdowns and restrictions have taken their toll on the economy over the past two years.

Figure 1: The government is not increasing lockdowns even though cases are surging
Figure 1: The government is not increasing lockdowns even though cases are surgingSource: Our World in Data, Macrobond

Currently, New Zealand is confronted with the Omicron variant. The population is relatively well protected as they boast one of the highest vaccination rates in the world (94% vaccinated). Even though the history of very strict lockdowns reflects the government’s extreme caution, they have now shifted their approach. Like most other countries, New Zealand is now aiming to manage Omicron instead of trying to eliminate it completely. This is illustrated by the stringency index which has not increased despite a significant spike in cases, literally “of the chart” (see Figure 1). This provides evidence that the government is indeed moving toward a strategy of opening up and ‘living with the virus.’ Looking at the experiences of predecessors, such as Australia, the US, and the UK, we expect that the main Omicron-related challenges in NZ will relate to labor shortages in many sectors as a result of large numbers of Covid-19 infections and quarantine rules.

We expect that the negative economic impact will mostly be concentrated in Q1. In this scenario, which is our base case, GDP will expand by 3.2% in 2022 (see Table 1). In the remainder of this report, we offer the reader insights on the most important factors expected to influence New Zealand’s growth path going forward, as the impact of the virus slowly recedes.

Table 1: Economic forecast New Zealand
Table 1: Economic forecast New ZealandSource: RaboResearch

Domestic developments

Normalization of Consumption?

Figure 2: Less mobility equals lower consumption
Figure 2: Less mobility equals lower consumptionSource: Google, Statistics New Zealand, Macrobond

The large swings in consumer demand and consumption over the past two years have been one of the main drivers of economic growth. Many of these swings were directly related to the strict government lockdowns, which limited people’s movements, thus leading to lower household consumption (see Figure 2). Going forward, we expect no more government lockdowns that will directly impact the movement of the population. Nevertheless, we foresee a transition period in the coming weeks during which people might limit their movements out of fear of getting Covid-19 or because they are sick or in quarantine. This short but steep peak in Covid-19 cases will result in an increase in staff shortages which, in turn, will worsen supply shortages. Furthermore, the drop in hours worked as a result of quarantines negatively affects household income. All three factors will constrain household spending but will be limited to Q1 of 2022.

Two Sides of the Same Coin

Once the Omicron peak disappears in the rearview mirror, there is – at first sight – much potential for an ‘eruption’ of consumption over the course of 2022. On the flipside, however, some dark clouds have been gathering that could partly derail this growth. If the legacy of Covid-19 continues to lead to higher prices and uncertainty, that could weigh on consumption trends. Let’s zoom in to examine the different factors.

Heading to the Stores

There are several reasons to be optimistic in terms of consumer spending once Covid-19 uncertainties recede. Firstly, NZ has experienced solid retail sales and electronic card transaction rebounds in periods when Covid-19 was absent (see Figure 3). Both indicators remained at elevated levels during the ‘second wave’ and currently show historic highs. Moreover, history shows that after previous periods of lockdown, year-on-year growth has been high. We expect a slight rebalance between goods and services now that consumers are once again able to visit restaurants and other hospitality and recreational venues. Still, earlier swings in lockdown intensity show that spending on services and goods move in lockstep. When the economy opens up, the increase in spending on services only slightly cannibalizes growth in spending on (non-durable) goods (see Figure 4). This underscores the potential for consumption in times of ‘freedom.’

Figure 3: Transactions are at high levels
Figure 3: Transactions are at high levelsSource: Statistics New Zealand, Macrobond
Figure 4: Rebalancing household spending
Figure 4: Rebalancing household spendingSource: Statistics New Zealand, Macrobond

Consumers appear to have been saving a large share of the income they could not spend during lockdowns. Household savings increased by 46% over the past two years (see Figure 5) representing an average increase of NZD 5,000 per capita in savings. Logically, when uncertainty declines, people start saving less and spending more. This happened last year when we learned more about the virus and how to combat it, as illustrated by the year-on-year growth (see Figure 5). Even so, the savings rate is still much higher than the pre-pandemic average. When Covid-19 uncertainty disappears this will make way for lower saving rates, meaning a larger share of income can be used for consumption.

Figure 5: Household savings through the roof
Figure 5: Household savings through the roofSource: RBNZ, Macrobond
Figure 6: House prices have surged
Figure 6: House prices have surgedSource: Real Estate Institute New Zealand, Macrobond

Furthermore, households might have postponed purchases or experiences during times of uncertainty. The additional spending power resulting from piled up savings can be used for such purchases from Q2 onward, further fueling the increase in household consumption. If all propped up savings were to be used for consumption in 2022, this would result in a 15% increase in consumption. Although we expect some of these savings to materialize in extra consumption, there are also factors that limit additional spending. For example, savings are being accrued by more wealthy households thus might be stalled at saving accounts rather than spend. Deleveraging is also possible as a result of higher interest rates and the outlook for higher prices (that is, inflation, which we’ll come back to later in this report). Therefore, we do not expect all additional savings to result in additional consumption.

Another reason for higher household consumption is the sense of wealth from homeowners. Real estate prices have been surging over the past year, growing more than 20% through 2021 (see Figure 6). Homeowners have seen the value of their houses increase at an historically high rate as a result of low borrowing rates. Higher housing prices create a sense of wealth among homeowners, leading to higher spending. Calculations show that, based on the increase in average house price since 2019, the average increase in consumption is NZD 6,000 per homeowner.[1]

Finally, unemployment is historically low, which means many people have a job and income (see Figure 7). This is positive for household consumption. But in a tight labor market, with limited supply combined with rising demand, upward pressure on wages is to be expected as well.

Figure 7: Tight labor market increases wages
Figure 7: Tight labor market increases wagesSource: Statistics New Zealand, Macrobond
Figure 8: Real wages are dropping… fast
Figure 8: Real wages are dropping… fastSource: Statistics New Zealand, Macrobond

It would seem that there is considerable potential for consumption to grow briskly in NZ in the coming year. Barriers to consumption are falling; there is a tight labor market with nominally rising incomes; and there is (potentially) pent-up demand stemming from excess post-pandemic savings and wealth effects. Does that sound too good to be true?

The Other Side of the Coin: Is Inflation the Party Pooper?

Quite likely. Generally, higher household income is a positive development because households can consume more. But when prices rise faster than wages, consumption may actually decrease due to the drop in households’ real spending power (see Figure 8). Thus, current high inflation figures can have a serious negative impact on consumption and economic growth. Indeed, we are already seeing some of these negative effects starting to materialize. These are described in the next section.

To start, inflation surged to 5.9% on a yearly basis in the December quarter. This is the highest inflation recorded in over 30 years. The key drivers of inflation are high prices for construction and housing resulting from higher input costs, which in turn, are due to high commodity prices and supply chain disruptions. Other drivers are high petrol costs as a result of high energy prices worldwide and an increase in the price of second-hand cars – another indication of the global supply chain issues. We expect inflation to remain elevated in the first half of the year before slightly easing in the second half. The main factors that determine the development and our expectations of prices over the course of 2022 are described in detail in Box 1.

Box 1: Inflation Expectations

We expect inflation to remain elevated in the first half of the year before slightly easing in the second half. Many of the main drivers of higher prices are external (supply) factors, such as the global economic recovery, conflict in Ukraine, supply chain disruptions, and commodity and energy prices. At the time of writing, there are many uncertainties about how the crisis in Ukraine will develop. The longer and more intense the conflict, the larger the effect will be on the energy supply, which will exacerbate the dynamics as explained below.

One of the most important drivers of inflation is the increase in energy prices – oil in particular, as this is one of New Zealand’s main imports. Looking forward, we continue to see more upside than downside risks to oil prices in the coming year. There is also a rapidly increasing geopolitical risk premium being priced into key commodities like oil, given the Russia-Ukraine conflict. In the event of a supply disruption, oil prices could spike quickly, as we saw during the First Libyan Civil War in 2011 when exports to Europe collapsed. The increase in oil prices, which are currently above $100 a barrel will be felt by consumers in 2022 through, for example, higher petrol prices.

The second key driver is food prices (see Figure 9). We expect food inflation to remain elevated for the coming months as a result of disruptions caused by Omicron and persistently high commodity prices. Food prices are impacted by a combination of high logistics costs, increased farm input costs (in the form of higher energy, labor, and fertilizer prices), and increased demand as a result of the waning Covid-19 pandemic and subsequent economic growth. If the conflict in Ukraine continues, it will have a significant impact on, for example, the price of wheat and corn.

Finally, supply chain issues were triggered by the Covid-19 pandemic and resulting restrictions. The inability to spend money on services during lockdowns led to a global increase in demand for goods. These circumstances collided with supply disruptions resulting from the spread of infections in producing countries. This has led to surging transport prices and shortages/large backlogs for certain products. This results in higher input prices for producers (see Figure 10).

Figure 9: Food prices are high
Figure 9: Food prices are highSource: Food and Agriculture Organization of the United Nations, Macrobond
Figure 10: Producers push through costs
Figure 10: Producers push through costsSource: Statistics New Zealand, Macrobond

We expect some of these costs to be passed on to consumers over the course of the year when sustainable economic growth leads to more stable consumer demand. In the second half of the year price pressures will ease as backlogs slowly disappear, inventories recover, consumer spending is more balanced between goods and services, and the high base level of prices enters the equation. However, new Covid-19 spikes could disrupt supply chains due to a shortage of workers, especially with regard to China, which continues to maintain its zero-Covid strategy. If they were to abandon this strategy, there is a real risk of new supply chain issues as a result of temporary worker shortages in factories and ports.

Rising inflation makes consumers uncertain about their financial situation. The first signs of faltering consumer sentiment can already be seen in consumer surveys (see Figure 11). Consumer confidence has been on a downward trajectory in recent months. Although much of this decrease can be explained by the headwinds caused by the Delta variant, consumers are increasingly aware of the potential negative impact of higher prices on their spending power and fear being worse off. This is suggested by the very low share of respondents who expect to be “better off next year than now,” which is at its lowest point since 2008. Similarly, households are increasingly reluctant to “buy a major household item,” which is another indication of households’ lower motivation to consume more. Both indicators do not really signal higher household consumption in future. On the contrary, this uncertainty may lead to consumers holding on to their additional savings and limiting their additional spending when the economy opens up. This constrains the upward potential of consumption in the remainder of 2022.

Figure 11: Consumer sentiment deteriorating
Figure 11: Consumer sentiment deterioratingSource: ANZ, Macrobond
Figure 12: House price growth slowly decreasing
Figure 12: House price growth slowly decreasingSource: Real Estate Institute New Zealand, RBNZ, Macrobond

 Monetary Policy: RBNZ Tightening

Despite the opposing forces, the increase in housing prices and surge in inflation has forced the central bank (RBNZ) to take action. In March 2021, the government submitted to the Monetary Policy Committee. It suggested hat the RBNZ should consider the government’s policy for sustainable housing prices in their pursuit of their operational objectives. Consequently, the bank introduced stricter loan-to-value restrictions for investors in May and for lending to home-occupiers in November. Next to these ‘macro prudential’ policy changes, the RBNZ was the first central bank to terminate their large-scale asset purchases and was one of the first central banks to increase interest rates. In their last meeting (February 2022), they further increased the to 1% while sending the unambiguous message that “more tightening is needed,“ which is literally the title of the Monetary Policy Statement. The central bank expects the OCR to be 2.2% in December 2022 and 3.2% at the end of 2023.

Tighter monetary policy in combination with stricter LTV ratios should, via higher mortgage rates, lead to a cooling of house price growth (see Figure 12). We expect the growth rate to continue to decrease since we expect the RBNZ to continue to tighten their monetary policy to fight inflation. As a consequence, the positive “wealth” effect of rising housing prices on household consumption (described above) will also be lower.

Moreover, higher interest rates incentivize households to save money simply because returns on their savings are higher (although still negative at current inflation levels). The combination of rising interest rates and increasing financial uncertainty could lead households to maintain a significant buffer of savings instead of spending when the economy opens up.

Lastly, one of the most important consequences of rising interest rates is that investing becomes less attractive when interest rates move up. Lower investments have a direct impact on economic growth, but also an indirect effect, for example, via lower demand for labor. In turn, this limits the rise in household incomes due to less hours worked and less upward pressure on wages.

But how will that coin land?

We described two sides of the same coin but how will these net out? In general we expect that increasing price pressures will really start to weigh on economic growth in the second half of the year. The positive developments for consumption and growth, as described above, will slowly erode over the course of 2022. Consumers and the economy in general will start feeling the pain of economic success in the second half of the year. This will constrain economic growth. The magnitude of the impact will be determined by the actual level of inflation (dependent on the factors explained in Box 1) and the RBNZ’s monetary policy. Taking recent developments into account, we expect that the risk is tilted toward the downside. If prices remain higher than currently anticipated, growth will be negatively impacted due to a combination of increasing financial uncertainty and the deterioration in spending power among households. Moreover, this could lead to an even tighter monetary policy, further constraining economic growth. The impacts of all factors are summarized in Table 2 at the end of this publication.

International Developments

Obviously New Zealand is very dependent on developments in the global economy. While tourists, migrants, and students might hit the shores over the course of 2022, there are also many uncertainties – the conflict in Ukraine being the most obvious. Moreover, economic activity is rebounding within the Asia Pacific but growth in China is projected to be lower than in past decades. How will these developments affect economic growth in New Zealand?

Recalibrated Trade Flows

High commodity prices have been both a blessing and a curse for New Zealand. While higher prices for food and wood benefit New Zealand businesses, the higher energy prices are a major drag on their profitability. On balance, global price developments are still in favor of New Zealand as illustrated by the terms of trade index (see Figure 13). The relative price of exports compared to imports has never been better for New Zealand than in the past year. The favorable terms of trade are also reflected in the export of goods, which are at historic highs. One of the reasons is that New Zealand was able to benefit from an increased demand in goods due to global lockdowns. The export value of every top-five New Zealand export product increased by more than 20%[2]. Going forward we expect growth of export in goods to soften as global demand will rebalance between goods and services. But as long as the global economy keeps expanding, there is a solid basis for New Zealand exports. Downside risks are continued high energy prices which will further weigh on relative terms of trade.

Figure 13: Terms of trade are favorable
Figure 13: Terms of trade are favorableSource: Statistics New Zealand
Figure 14: Service exports to recover?
Figure 14: Service exports to recover? Source: World Bank

Furthermore, any loss in export of goods will probably be offset by an increase in service exports. Currently, total exports are still much lower (-6.8%) than before the pandemic.[3] This was caused by the dramatic drop in service exports (-46%), which are unable to recover as long as international borders remain closed. We expect service exports to bounce back gradually when borders reopen (see Figure 15). If service exports recover to pre-pandemic values, this could add another 3.7% to annual GDP, all else being equal.

That being said, as with the outlook for consumption, there are also complicating factors when it comes to the external outlook. Below we single out China and geopolitical tensions including the conflict in Ukraine.

Slowing Chinese Economic Growth

China is New Zealand’s largest export partner representing almost one third of total exports (see Figure 16). The Chinese economy is facing headwinds entering 2022. Therefore, we expect the Chinese economy to grow a meagre 4.3% in 2022, which is very low for Chinese standards. One of the main challenges is the Chinese property sector, which is still facing (potential) bankruptcies as a result of overleveraging, a decline in demand for housing, an oversupply of houses, and reduced access to funding. This will not only directly impact New Zealand’s exports due to lower demand for construction materials like wood (16% of exports to China) but also indirectly via lower consumer demand for New Zealand’s main export products like dairy and meat.

Figure 15: Exports should gradually increase
Figure 15: Exports should gradually increaseSource: Statistics New Zealand, Macrobond
Figure 16: A third of NZ exports go to China
Figure 16: A third of NZ exports go to ChinaSource: Trade Map

Furthermore, China’s zero-tolerance Covid policy will be increasingly difficult to uphold given the highly infectious nature of the Omicron variant. In the absence of a new vaccine rollout (since currently used vaccines provide insufficient protection) and given low levels of natural immunity, local lockdowns are likely to continue and weigh on China’s domestic demand as long as transmission of Covid-19 remains a threat.

War in Ukraine

The conflict in Ukraine has escalated in recent weeks. Prime Minister Jacinda Ardern “strongly condemns Russia’s invasion of Ukraine and joins the international community in calling on Russia to immediately cease military operations in Ukraine.”As a result,the NZ government has imposed sanctions on Russian officials, prohibited the export of strategic goods to Russia, and suspended bilateral foreign ministry consultations.

In terms of bilateral trade the direct economic impact is relatively limited. Russia is ranked 25th in terms of export value and 24th in terms of import value, and accounts for less than 0.8% of both New Zealand imports and exports. In terms of specific or essential imports, there is one product category where New Zealand dependence on Russian exports is larger than 5%: “Mineral fuels, mineral oils and products of their distillation.” Russian imports account for 7.7% of the total imports in this product category. So in this category New Zealand is relatively vulnerable compared to other product categories. NZ might need to source these product elsewhere in case of stricter sanctions. This will probably lead to higher prices.

Does this mean that the effect on the New Zealand remains very limited? Unfortunately not. The impact will still be felt through higher prices. If tensions in Ukraine escalate, it will severely impact global commodity prices. Russia is a large exporter of many key commodities: energy, grains, fertilizer, and metals. If the crisis escalates further, the supply of these commodities from Russia is very uncertain. Detailed scenarios for economic implications can be found in this publication (including calculations on purchasing power and inflation). Most of the impact will be directly felt by NZ producers, as input prices will significantly increase. Consumers will be indirectly impacted as producers push through these higher input costs, but they will also experience direct impacts through, for example, higher fuel costs. As a result, inflation will increase and business investments and household purchasing power will deteriorate, which results in lower consumption – all factors limiting economic growth. The magnitude of this effect will be determined by the length and intensity of the conflict. A longer and more intense conflict will have a greater impact on prices and more negative impact on global and NZ economic growth. A short-term resolution will be less impactful.


Experiences from other parts of the globe give reason to be optimistic that the economic impact of Covid-19 will be temporary as a result of a short, but high, peak of Omicron infections. The subsequent reclaimed freedom has the potential to accelerate household spending as consumers are able to spend propped up savings on dearly missed experiences. However, consumers are already feeling the pain of price increases which will constrain their future spending.

Furthermore, the solid economic recovery and price effect as result of supply disruptions caused by the conflict in Ukraine will lead to elevated inflation. The central bank is poorly equipped to fight cost-push inflation (a result of supply shortages). Raising interest rates too quickly would deal a double whammy to growth considering that demand will also be eroded by higher prices. From this perspective it seems wise that the RBNZ decided to hike interest rates by 25bps instead of 50bps, although they explicitly said they have not ruled out larger increments in 2022. They are very clear in their guidance that more tightening is needed.

As such, the recovery is likely to be not as strong as it looks at face value. In the first half of the year the New Zealand economy will likely benefit from a strong rebound from the pandemic. But in the second half of the year the country will feel the brunt of its own success through higher prices and a deterioration of purchasing power leading to lower consumption. Higher interest rates will further constrain household consumption.

Finally, the outlook for trade is positive as the reopening of borders allows service exports to recover and global economic recovery leads to a global increase in demand. Downside risks are related to new variants of Covid-19, escalation of the war in Ukraine, and a slowdown in global economic growth, in China in particular, New Zealand’s largest trade partner.

Table 2: Overview of the impact of developments on economic growth and prices
Table 2: Overview of the impact of developments on economic growth and pricesSource: RaboResearch


[1] Based on research by RBNZ on housing leverage and consumption.

[2] Top five exports in value (Q3 2021): Dairy products, meat, wood, fruits, and beverages

[3] Calculations are based on Q3 2019 and Q3 2021, This is the latest available data.

Wouter van Eijkelenburg
RaboResearch Global Economics & Markets Rabobank KEO

naar boven