New Zealand

New Zealand recorded robust GDP growth in the 2000s and 2010s by OECD standards, with +3% and +3.2% on average, respectively. Thanks to a swift policy reaction, which consisted of stringent rules that contained the pandemic, the economy experienced a comparatively moderate Covid-19 slump in 2020, with GDP contracting by -1.1%. The country experienced a strong recovery in 2021 (+6% growth), but a central bank tightening cycle from end-2021 onwards undermined consumption growth which, combined with a deteriorating global trade environment and rising energy prices, resulted in a slowdown of economic growth to +2.3% in 2022. New Zealand even experienced a technical recession, with GDP contracting by -0.9% q/q in Q4 2022 and by -0.2% q/q in Q1 2023. For the full year 2023, growth is expected at less than +1%, jeopardized by persistent high inflation, weak consumption and floods. However, in 2024-2025, we expect annual average growth to be lifted to the range of +1.5% to +2%, thanks to the economic reopening of China, New Zealand’s main trading partner, the gradual recoveries of other export markets (supported by free-trade agreements), increased investments in infrastructure and a consumption rebound.

The Reserve Bank of New Zealand tightened its monetary policy from October 2021 on, trying to tackle rising inflation prompted by disturbances in supply chains and furthered by the global hike in energy prices in 2022. Consumer price inflation increased to an average of 7.2% in 2022 and remained elevated at 6.5% in the first half of 2023. Notably, food prices are set to remain elevated for some time after the damages to agriculture caused by Cyclone Gabrielle, though goods prices should decline due to a moderation of petrol prices and lower domestic demand. Overall, inflation is forecast to decelerate gradually, and to fall below 3% only in the course of 2024. Hence the policy interest rate, which was hiked from 0.25% in August 2021 to 5.50% in May 2023, should stay at this level, with little chances of a loosening before the second quarter of 2024.

The New Zealand dollar (NZD) has seen a weakening trend against the USD in the past years, depreciating from NZD1.36:USD1 in February 2021 to NZD1.79:USD1 in September 2022. Since then it has stabilized, thanks to monetary tightening. Looking ahead, the NZD should benefit in 2024 from the soon expected ending of the US Federal Reserve's tightening cycle, and from an improving external sector.

New Zealand has a very favorable business climate, sharing first place in our business environment rating. The Heritage Foundation’s Index of Economic Freedom survey 2023 ranks the country 5th in the world for doing business, and 3rd in the Asia-Pacific region. New Zealand scores especially with regard to property rights, judicial effectiveness, government integrity, trade freedom and financial freedom. But there is still moderate room for improvement regarding the tax burden, labor freedom and investment freedom. The World Bank Institute’s annual Worldwide Governance Indicators surveys indicate very high levels of regulatory quality (rank 6 worldwide), the rule of law (rank 5) and control of corruption (rank 3). Meanwhile, our proprietary Environmental Sustainability Index puts New Zealand at rank 22 out of 210 countries, reflecting very good resistances to climate change and water stress, fairly good proficiency in energy use compared to GDP, renewable electricity output and CO2 emissions compared to GDP. Only the recycling rate of the country is very judged poorly.

Former labor minister for education and Covid-19 response Chris Hipkins was appointed Prime Minister after the unexpected resignation of his popular predecessor Jacinda Ardern in January 2023. Since then, Hipkins has enjoyed relative popularity, supported by his quick response to the severe floods of February 2023 and his support of households during the cost-of-living crisis. Currently in a cooperation deal with the Green party, the Labor party is expected to remain in place even after the general elections scheduled for October 2023, but likely with a tighter score than after the poll in 2020, when Labor was handed an absolute majority in Parliament. It should broaden its coalition to be able to govern, possibly including the Maori party and the Green party. The policy orientation would therefore change to include more socially and environmentally protective measures, albeit while ensuring not to alienate centrist voters or jeopardize the country's strong agricultural sector.