The New Zealand economy made a sharp rebound in Q2 as it avoided a recession thanks to the easing of Covid restrictions and the return of tourists to the country.

According to official data published on Thursday, New Zealand’s GDP rose 1.7% in the second quarter, surpassing forecasts for a 1.0% increase and marking a well-timed recovery from Q1’s 0.2% decline.

Annual growth decelerated to just 0.4%, Reuters reports, but this was impacted by numerous Covid lockdowns.

The central bank, the Reserve Bank of New Zealand (RBNZ), has raised interest rates by 275 basis point to 3.0%, and says it will have to reach at least 4.0% in order to slow demand sufficiently to curb inflation.

Markets have almost totally priced in additional rate hikes to 4.25%, as consumer price inflation reached a 30-year high of 7.3% in the second quarter and the labour market remains tight.

Demand was spurred on by the opening of New Zealand’s borders as tourism spending soared 157% compared to Q1.

"Households and international visitors spent more on transport, accommodation, eating out, and sports and recreational activities," according to Stats NZ's industry and production senior manager Ruvani Ratnayake.

The growth was focused in the services sector, as household spending on goods fell during the second quarter, the Reuters report adds. This helped to boost the expenditure measure of GDP by 2.1% for the quarter.

In addition, house prices in New Zealand are falling, as elevated borrowing costs burst the bubble that arose during the pandemic, resulting in values to fall 6% in August compared to the year before.

"Importantly, the downturn in the housing market signals a period of broader softness in household demand," said Michael Gordon, acting chief economist for NZ at Westpac.

"As signs of softening in demand become increasingly evident, we expect that the RBNZ will become increasingly comfortable that the tightening in monetary policy is having the desired dampening impact,” he added.