But the risk of another lockdown, ongoing headwinds from border restrictions on tourism and the cooling of other factors which drove the economy in 2020 meant the recovery could slow, unless investment from businesses improved.
"Households (and government) have done much of the recovery's heavy lifting but, with a low saving buffer, they cannot continue to prop up the NZ economy," Smith said.
"We need to see business investment step up to provide more backbone to the expansion but doing so requires a leap of faith that many firms still appear reluctant to take in such an uncertain environment."
Covid impact to endure
Smith said that Covid-19 remained number one on the bank's list of topics to watch. Generally viral outbreaks led to swift economic recoveries, with major policy stimulus and the speedy development of vaccines boosting markets.
"The outbreak demonstrated how flexible and adaptable we can be if needed and this could help bolster future resilience. However, Covid-19 is still a huge negative shock and will continue to dominate the political, economic and market narrative for some time to come," Smith wrote.
The virus was still having a major impact in the Northern Hemisphere, and could cause more problems globally.
"There could still be a sting in the tail from Covid-19 if the vaccine rollout proves to be slower or less effective than expected, or if newer virus strains prove impervious to the existing vaccines."
Two-sided risk to housing market
House prices unexpectedly surged throughout 2020 as interest rates fell and spending usually put towards international travel went into assets. ASB estimates that at the end of last year house prices were rising at an annualised rate of 15 per cent, with forecasts for a double-digit rise in 2021.
But Smith warned that this may prove too optimistic "given stretched affordability, low net immigration, increasing dwelling supply, the reimposition of lending restrictions and other RBNZ measures to slow housing demand".
Population growth 'key variable'
Between 2014 and 2017, the net gains from migration hit a series of record levels, but the figure dropped sharply as a result of border closures related to Covid-19, allowing infrastructure investment to catch up with population growth.
"This should leave NZ in an enviable position of being able to pick and choose who settles here," Smith said, although it had hit the tourism and international student market.
"It remains to be seen if policymakers revert to pump-priming the economy via encouraging mass immigration and tourism."
When to remove 'life support'?
The Reserve Bank slashed interest rates in March amid fears of a severe economic contraction and concerns the economy may enter a deflation spiral. While ASB expected inflation to remain low this year, there were a series of factors which could see pressures increase, which could see interest rates raised earlier than 2023, its current forecast.
As well as rising commodity prices and pressures caused by increasing house prices, Smith said wage inflation could become more of a factor this year as workers became less concerned about keeping their jobs and more about raising their incomes.
"The economy is hardly booming at present, but with the immigration tap turned off for now, skill shortages are likely to intensify over the course of the year. This could see the emergence of a bout of wage inflation, particularly in those sectors where capacity pressures are most acute, and firms have scope to absorb higher wage costs in their margins or to increase prices."
