How the Covid-19 pandemic changed our economy

Wednesday, 26 March 2025

New Zealand's largest city filmed by cameraman Geoff Mackley during Covid-19 lockdown.

Five years ago the country went into lockdown as the Covid-19 pandemic moved across the globe.

But if it didn’t happen, would the cost of living have spiked, would house prices have increased, and would mortgage rates have gone so high?

What was the economy like before the pandemic?

Before Covid-19, economic growth had cooled, but was still fairly healthy, with GDP growth of 3% over 2019.

The country went into Covid-19 lockdown on March 25, 2020.

Unemployment was sitting at 4.1%.

Westpac senior economist Satish Ranchhod said, with interest rate reductions in the year prior to the pandemic, growth was expected to pick up going into 2020.

So did we only go into a cost of living crisis because of the pandemic?

The short answer is yes.

Infometrics chief forecaster Gareth Kiernan said this was partly due to the supply disruptions caused by the pandemic itself and partly due to monetary and fiscal policy responses that boosted demand unsustainably across the economy.

The Ukraine war also contributed to higher costs for energy, fertiliser, and some food items.

How was CPI and GDP affected?

The consumers price index (CPI) measures the rate of price change of goods and services purchased by Kiwis.

At the end of 2024, the CPI was higher than forecast five years ago and average wages were 10% higher, Kiernan said.

“Everything costs more now than it otherwise would have done.”

But this was not unique to New Zealand, Kiernan stressed.

“Export prices are 18% higher and import prices 17% higher than had been expected, reflecting the mix of international and domestic price pressures caused by the pandemic.”

Gross domestic product (GDP) was also affected by Covid-19, as was the country’s population.

After the initial lockdown worked its way out of the numbers, the size of the economy was generally trending above pre-Covid expectations – by as much as 1.3% by mid-2023, Kiernan said.

“Yet in 2022, population was as much as 1.2% below pre-Covid expectations, creating a large gap between demand (GDP) and supply. The cost implications of that supply shortfall were exacerbated by various international factors, including a similar surge in demand, supply chain and international shipping disruptions, and the Russian invasion of Ukraine.”

New Zealand moved into a technical recession last year, but the latest GDP figures for the December 2024 quarter show the country had finally moved out of it.

Did house prices rise because of the pandemic?

House prices were 28% higher than initially forecast for 2024, indicating the deterioration in housing affordability caused by the boom when interest rates were ultra-low during the early part of the pandemic, Kiernan said.

House values ballooned through the pandemic.

In 2020, the average house value was $725,981, which was up 7.8% from $673,600 in 2019.

The average price then rose to $901,205 in 2021 and $1,025,826 in 2022 before dropping to $902,023 in 2023 and rising slightly last year to $925,343.

In 2019, the average household was spending 35.4% of household income on mortgage rates. This dropped to 34% in 2020 before skyrocketing as high as 48.9% in 2024. The last time it had reached the 40s was in 2008 when it was estimated about 45.1% of a household income was spent on mortgage repayments.

How were interest rates affected?

In 2020, the Reserve Bank of New Zealand significantly lowered the OCR from 1% to 0.25% for a year due to Covid-19.

Because of the pandemic and subsequent imbalances in the economy, interest rate movements were much more extreme than had been expected pre-Covid.

“Instead of gradually tracking upwards from 1% in 2020 towards 2% over the next few-years, 90-day bill rates, which closely mirror the OCR fell to about 0.3% in 2020 before lifting to 5.7% during 2022 and into 2023,” Kiernan said.

“This increase was a direct result of the need to reduce aggregate demand across the economy, thereby working to bring inflation back under control.”

Wesptac senior economist Satish Ranchhod said if it wasn’t for the pandemic, it was not likely that New Zealand would have seen interest rates dropping to the extent that they did.

“The large interest rate falls we saw were a response to the ‘emergency’ conditions caused by the pandemic. And the rapid increases we saw in recent years were needed to quell the resulting sharp rise in inflation.”