Last year wasn’t easy for New Zealand’s economy. HSBC even estimated that we had the steepest drop in GDP among developed countries. The Economist ranked us just above Finland, Latvia, Turkey, and Estonia when considering stock market performance, inflation, unemployment, and government deficits. So, what went wrong?

The Covid-19 Factor

A big part of the issue was how the government handled the Covid-19 pandemic. They pumped around $60 billion through the Covid-19 Response and Recovery Fund, with $12 billion going to wage subsidies right at the start.

According to Simplicity’s chief economist Shamubeel Eaqub, that level of spending was massive compared to other countries.

“We had a lot more stimulus during the Covid years, and then we faced sharp restrictions from monetary and fiscal policy afterward. The government injected a ton of money, but then pulled back heavily,” he explained.

Businesses thrived during the lockdowns, which was unusual. Eaqub added, “We’ve never seen businesses so profitable. There was free money flowing into accounts, which prevented massive job losses.”

Interest rates were slashed, and lending rules were relaxed, giving the economy a temporary boost.

But Inflation Came Knocking

The fiscal response juiced the economy for a while, says Westpac chief economist Kelly Eckhold, but it also pushed inflation higher. To control this, the Reserve Bank responded with aggressive interest rate hikes—among the sharpest in the world.

The goal? To intentionally slow down the economy and curb rising prices.

Eaqub noted that other countries, like Australia, took a more cautious approach. “They didn’t hike rates as much and chose to protect their job market,” he said.

In contrast, New Zealand’s Reserve Bank focused solely on fighting inflation after changes made by the previous government removed employment considerations from their mandate.

Eaqub added, “They’re still keeping rates tight even when the economy is struggling. It feels like they’re determined to crush it just to control inflation.”

Housing Market and Immigration Woes

The Covid-era spending rush funneled money into the property market, which led to a crash later. The result? A housing slump and a construction slowdown, making people feel financially worse off.

Immigration, which usually boosts the economy, didn’t bring a lift in the standard of living. Instead, it just increased the population without making people better off.

Hope on the Horizon?

Eckhold thinks there’s reason for cautious optimism. “The Reserve Bank has already eased interest rates by 125 basis points, and we expect another 50 soon. That should lead to better growth outcomes,” he said.

While he’s not predicting “stellar growth,” he expects the economy to return to its normal trend.

Eaqub echoed a positive note: “We haven’t seen massive job losses like in previous recessions, and job ads are starting to stabilize. That’s a good sign for recovery.”

However, challenges remain, including China’s weaker economy and lingering trade tariffs from the US.

Infometrics chief forecaster Gareth Kiernan added that factors like strict lockdowns, border closures, household debt, migration, export prices, and population growth also played a role in New Zealand’s economic struggles.

Despite everything, experts believe we’re slowly moving toward stability. Let’s hope that 2024 brings better days for everyone