WELLINGTON, New Zealand—New Zealand is ending its effort to keep Covid-19 out of the remote South Pacific country as the economic costs mount and after its latest lockdown failed to halt the spread of the virus.

Pandemic restrictions in the country’s largest city, Auckland—in place after a Covid-19 outbreak in mid-August—will be eased in stages starting this week, New Zealand Prime Minister Jacinda Ardern said Monday.

New...

WELLINGTON, New Zealand—New Zealand is ending its effort to keep Covid-19 out of the remote South Pacific country as the economic costs mount and after its latest lockdown failed to halt the spread of the virus.

Pandemic restrictions in the country’s largest city, Auckland—in place after a Covid-19 outbreak in mid-August—will be eased in stages starting this week, New Zealand Prime Minister Jacinda Ardern said Monday.

New Zealand, with a population of around five million, was an early success story of the pandemic, adopting a version of China’s aggressive lockdowns and closing its border, which initially halted the spread of the virus.

It has recorded about 4,000 cases of Covid-19 so far and very few deaths. Industries such as tourism and hospitality have shriveled even as wage subsidies prevented broader job losses and supported consumption.

But its strategy has become increasingly untenable as the more contagious Delta variant of the virus has become endemic in other countries, which are increasingly reopening, including neighbor Australia, which plans to restart international travel in November. Former New Zealand Prime Minister John Key recently said the country had become a “smug hermit kingdom.”

Infections in the current outbreak in New Zealand have been low by international standards, but persistent, as the virus spread among poorer households and into surrounding regions.

Ms. Ardern said the government is aiming to “actively control the virus,” a contrast to earlier rhetoric of stamping it out. About 40% of New Zealand’s overall population has been fully vaccinated, but the rate is higher in Auckland, according to the country’s Ministry of Health.

The first reopening step for Auckland, which is home to about 1.5 million people, will be effective Wednesday and allow two households to meet outdoors, up to a maximum of 10 people, and permit recreational activities such as going to the beach or hunting.

The government will assess progress each week before allowing further relaxation of restrictions, Ms. Ardern said. Vaccinations are allowing the country to move on from lockdowns, she said.

New Zealand’s economy is likely to contract by 7.0% in the three months through September compared with the previous quarter, reflecting the impact of the Auckland lockdown, said Jarrod Kerr, chief economist at Kiwibank.

According to forecasts by New Zealand’s Treasury, government debt will more than double from pre-pandemic levels due to the costs of the lockdown strategy, although it will remain low by international standards.

Ms. Ardern’s initial response to the pandemic was enormously popular in New Zealand and helped her party to a landslide victory in late 2020 that allowed it to govern alone, instead of a multiparty coalition, which usually prevails.

However, consensus about the elimination strategy has begun to falter. Modelers affiliated with the government have disagreed on potential outcomes from reopening. One modeler forecast 7,000 deaths in a year even with a 90% vaccination rate, prompting widespread skepticism.

Simon Thornley, an epidemiologist at the University of Auckland, said the government has been distancing itself from the Covid-19 modeling, recently emphasizing that it comes with limitations and caveats.

“I think it is finally a realization that the elimination strategy and the modeling that justified it must be abandoned in this country,” said Dr. Thornley, who has been critical of lockdowns. “The costs to business, the economy, mental health and national debt are too great.”

Write to Stephen Wright at stephen.wright@wsj.com