An economist is warning a "hangover" awaits the country, with the unexpected boost in GDP masking an underlying deterioration in the "quality" of the economy.
Statistics NZ on Thursday announced 1.6 percent growth in the March quarter, more than triple what the major banks were expecting.
"This was a much higher number than anyone was expecting - we were expecting maybe half a percent growth, instead we saw 1.6," ANZ chief economist Sharon Zollner told The AM Show on Friday.
"It was actually really broad-based - construction was very strong and retail spending, so households are spending pretty freely at the moment."
But the source of that money is a concern. Rather than being earned, much of it is borrowed.
"There's clearly been a deterioration in the quality growth in terms of how sustainable it is, because essentially the tourism industry used to earn as much foreign exchange as dairy did, and rather than that foriegn money coming in and spending that, we're spending borrowed money," said Zollner.
"Obviously the wage subsidy was hugely successful, but it's left us with a legacy of Government debt, and household debt is also very high. We will have to pay the piper at some point."
Low interest rates have fuelled a dramatic rise in house prices. Last month Zollner said they wouldn't stabilise until interest rates were hiked, but in the meantime, people making huge capital gains are helping keep GDP growth up.
"That tends to have a 'wealth effect' - makes those fortunate enough to own houses at least, feel a bit wealthier," she said on Friday.
The data backs that up, showing household consumption rising from 61.4 percent of the economy before the pandemic to 63.5 percent in the March quarter.
"While the hole in GDP has been largely filled by debt-fuelled domestic activity (both household and Government debt), debt is hardly a sustainable substitute for this lost income," Zollner said in ANZ's review of the GDP figures, released on Thursday. "New Zealand has suffered a big negative income shock. While the size of the economy may have bounced back spectacularly, the quality of growth has deteriorated markedly... A hangover awaits, somewhere down the track."
Zollner said the economy is "very distorted" at the moment, and the near-future remains highly uncertain, making it difficult to predict.
"The tourism sector's obviously still reeling, but construction is booming. So it's very unclear what's going to happen when the border opens - it's going to be stop-start for sure. We don't know how many tourists are going to come here, we don't know if we're going to have a flood of immigrants or a flood of people going out. It's really uncertain."
The record construction boom is driving inflation upwards, with shortages of labour and supplies. Zollner said Australia is having the same problems, but offers higher wages which "could be a problem" for us when international borders open up.
"Demand is not a problem, clearly, and low interest rates don't help the supply side of the economy - they address the demand side. Are they the right medicine for the current situation? That's up for discussion."
The next update to the official cash rate is due in July, but it's widely expected the Reserve Bank will hold off raising it until early or mid-2022.