Economic Weekly: The evolution of the rolling maul

COVID’s rolling maul of unexpected economic challenges rumbles on.

The unusual nature of the post-COVID cycle has given rise to a series of issues no one could have foreseen. From an out-of-control housing boom, to fretting about how to restrain it, port logjams and broader supply chain difficulties…the latest issue to pop out of the maul is capacity constraints. Shortages, in other words. Not just of building materials and other (mostly imported) goods but, increasingly, labour.

These constraints are quickly becoming the number one issue for many of the firms we talk to, and they’re also becoming more obvious in the data. Take last week’s NZIER Quarterly Survey of Business Opinion (QSBO). Reported difficulties of finding skilled labour reached a 2-year high. Firms’ cost expectations over the coming quarter hit a high not seen since 2008. And the percentage of firms reporting sales/demand as the main factor limiting turnover fell to the lowest level since 1974.

Higher prices (inflation) and a squeeze on profitability are two of the more obvious macro implications. Both of these were on display in the QSBO. Labour shortages also support our growing sense that: a) unemployment will remain in the “4’s” this year rather than head back up through 5%, and b) wage inflation is set to accelerate from here. We’ve recently moved to explicitly factor higher wage inflation and lower unemployment into our published forecasts (see table). 

Offering higher wages to attract staff will only work up to a point though, if the requisite workers simply aren’t available. Such is the reality of the closed borders and the recruitment issues parts of the agricultural sector in particular are having. This speaks to another consequence of a capacity constrained economy – lower output than otherwise. Some industries – notably construction and horticulture – are constrained to the extent that activity will have to be scaled back. This adds to the growth challenges we see for the economy this year. Still, whispers of ‘stagflation’ are premature. Next year is still shaping up to be a strong one given strengthening global tailwinds.

Overall, we’re left more confident in our view that inflation is set to lift this year, starting with Wednesday’s Q1 print. The key question everyone is asking though is how long-lasting the uptick in inflation will be. Temporary as the world’s central banks expect? Or less so, as market pricing for earlier stimulus withdrawal would imply. Uncertainty abounds, but we expect inflation to hold at higher levels than RBNZ forecasts (chart above), supporting our view the RBNZ will begin the stimulus withdrawal process in the back half of next year.