ASB's latest Quarterly Economic Forecast predicts just a 3 per cent annual GDP decline by year end – a significantly better outlook than the 6 or 7 per cent predicted in March.
The forecast points to New Zealand's 2020 economic outcome being similar to Australia's, with both countries benefiting from China's rebound, although Australia's 2021 recovery is expected to be stronger given New Zealand's ongoing border constraints.
"Fear of losing jobs has quickly given way to fear of missing out on a bargain or some fun, and the sheer degree of support the economy has received means the country has fared far better than previously expected," said ASB chief economist Nick Tuffley.
"Globally, New Zealand is faring better in 2020 than many developed countries, with estimated annual declines of seven per cent in the EU and 11 per cent in the UK, compared with our forecasted 3 per cent in New Zealand."
In the first six months of the year, New Zealand's economy contracted 13.4 per cent as a result of the strict four-week lockdown, however, a smoother than expected exit from lockdown and return to normality has seen Kiwis reaching for their wallets.
By October spending in most retail sectors was back to pre-Covid levels and significantly up in several areas.
"Given the events of 2020 and the impact of Covid, to finish the year down only 3 per cent from 2019 is phenomenal," Tuffley said.
"However, we need to remember that much of that drop is concentrated in the tourism sector, which continues to be held back by the border closure."
Given how strongly households have responded to recent low mortgage rates, ASB no longer expects the RBNZ to cut the OCR to a negative level.
"China's rebound has been particularly good for our key commodity and food exports, which have held up well," he said.
For the 12 months ending September, exports of dairy, meat, fruit and wine were all well above the previous year, which has helped offset the 43 per cent decline in the export of services, in particular international tourism."
"Given the global challenges, we remain relatively cautious about the pace of growth for 2021 and 2022," Tuffley said.
"We expect growth prospects to be muted over 2021 with the border likely to stay closed, and weak global growth limiting our export performance."
"Vaccine distribution at a level where border restrictions can be relaxed will still be some time away, so in our view, strong New Zealand and global recoveries are a story for some time in 2022."