New Zealand – Labour Stays Strong

The government’s capable management of the COVID-19 pandemic has helped to sustain popular support for Prime Minister Jacinda Ardern and her center-left Labour Party, which last October became the first party to win an outright parliamentary majority since the introduction of the MMP voting system in 1996. Opposition leader Judith Collins is meanwhile in a fight to remain at the helm of the National Party, and with the party’s support slumping to 23%–26%, compared to 39%–45% for Labour, whoever leads the party going forward will have few weaknesses to exploit ahead of elections in 2023.
The numbers for COVID-19 infections and deaths have been kept remarkably low by means strict and lengthy lockdowns, and the polling data indicates that most voters accept the trade-off, no doubt in part because the economic hit has not been more severe than in other countries that adopted a less aggressive strategy. The government’s three-stage road map for reopening the economy based on vaccination rates is seen by the vast majority as a sensible strategy that will permit the easing of some of the most onerous restrictions sooner rather than later.
The Ardern government’s attempt to balance its relations with western allies and China is evident in New Zealand’s non-participation in the defense alliance formed by the US, the UK, and Australia and its decision to pass on joining a Quad-Plus arrangement that would have expanded an existing grouping of Australia, the US, Japan, and India. It is debatable whether New Zealand will be able to maintain its independent posture as relations between the superpowers become more polarized, a consideration that has implications for investment and trade interests that hinge on positive bilateral relations with China.
The tightening of lockdown measures in response to a jump in new COVID-19 cases reinforced the negative impact of a weaker base effect on year-on-year real GDP growth in the July–September quarter, which was in any case expected to slow markedly after expanding by 17.4% in the previous quarter. The reopening of the economy and improving terms of trade point to a revival of economic activity over the next two quarters, and annual growth is forecast to exceed 5%.
An improving economy is leading to a tightening of the labor market, generating upward pressure on wages that in combination with higher global prices for commodities pushed inflation up to 3.3% in the second quarter, exceeding the upper limit of the RBNZ’s target range. Monetary authorities responded by hiking the official cash rate for the first time in seven years earlier this month. The quarter-point increase nudged the rate up to 0.5%, leaving plenty of room for additional tightening without undermining the economic recovery. With inflation continuing to rise through the third quarter, the RBNZ will likely make use of that flexibility to implement another small rate increase before the year is out.
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