Budget 2021

Budget Policy Statement

Economic and Fiscal Forecasts

Economic outlook and forecasts

Recent economic data shows the New Zealand economy is making a strong recovery from the initial impact of the global COVID-19 pandemic. The success of New Zealand's decision to go hard and early to stamp out COVID-19 meant the economy was able to open up quickly after health restrictions were lifted. The restrictions placed on activity in the June 2020 quarter to limit the spread of the virus contributed to the sharpest fall in real GDP on record, with a quarterly contraction of 11.0%. The economy then grew by 14.0% in the September 2020 quarter, with GDP at the end of September higher than it was before COVID-19.

The Labour-led Government took a decision to support businesses and workers through the Alert Level 4 and 3 restrictions with significant investment in policies like the Wage Subsidy, which supported nearly 1.8 million jobs by helping people to stay connected to their employers. The relative success of New Zealand's response compared to other advanced economies can be seen through unemployment rates, which have already peaked at more than 10% in the United States and Canada, and at 7.5% in Australia.

In New Zealand the unemployment rate was 4.9% in the December 2020 quarter, down from 5.3% in the previous quarter. This compares to forecasts at the time of the May 2020 Budget that unemployment would reach as high as 9.8% in the September 2020 quarter, and remain above its current rate throughout 2021.

The Half Year Update showed an improvement in the outlook compared to the Pre-election Update and the Budget Update, with the New Zealand economy forecast to rebound strongly in 2021, similar to Australia and the United States and outperforming the Euro Zone, the United Kingdom and Japan. Economic growth is expected to pick up further as border restrictions are eased over time.

Both September quarter GDP and December quarter unemployment data came in stronger than the Treasury forecast in the Half Year Update, published on 16 December 2020. Global vaccine development is occurring at a strong and steady pace, although recent supply issues in Europe are a cause for concern. New Zealand’s vaccine plan will mean our immunisation programme is keeping us at the forefront of a combined health and economic response to COVID-19.

Private consumption rebounded in the second half of 2020 as a result of accumulated savings from higher alert level periods, rising consumer confidence and a lack of overseas travel options. Household spending increased 14.8% in the September 2020 quarter, with increases across all expenditure categories, although it was still down 1.4% for the year to September 2020. Consumption in the year to March 2021 is forecast to be 4.6% below the previous year. After falling by 14.8% from the 2020 March to June quarters, retail trade sales volumes bounced back by 28% in the September quarter to be 8.3% higher than in the 2019 September quarter.

However, there remains a high degree of uncertainty around the trajectory of the recovery, particularly as new variants of the virus emerge overseas, and as countries around the world are experiencing worsening third waves of infection. In its Half Year Update the Treasury presented two alternative scenarios: one with a stronger domestic recovery, and one where resurgences in COVID-19 in the community lead to a further contraction in economic activity.

Table 3 - Summary of the Treasury's Half Year Update economic forecasts

June years 2020
Real GDP growth
(annual average % change)
-2.1 1.5 2.6 3.7 3.8 3.2
Real GDP per capita
(annual average % change)
-4.0 -1.0 1.9 2.7 2.7 2.0
Unemployment rate (June quarter) 4.0 6.6 6.8 5.7 4.7 4.0
Consumers Price Index
(annual % change)
1.5 1.4 1.2 1.4 1.8 2.1
Wage growth (annual % change) 3.0 2.3 2.2 2.3 2.8 3.3
Current account (annual, % of GDP) -1.9 -2.8 -3.8 -3.4 -3.2 -3.2

Sources: Stats NZ, the Treasury

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