23 February 2022
The Omicron effect
COVID-related pressure on New Zealand's economy caused a 3.7% drop in growth in the third quarter of 2021, however early indications show the economy bounced back by the end of the year. Omicron, now quickly spreading in the community, is expected to cause significantly less economic disruption than previous major outbreaks but will still have an impact, according to ASB chief economist Nick Tuffley.
"We are now living with COVID, and the government has already signalled lockdowns are a thing of the past, however, we are going to see workforce disruption caused by absenteeism through sickness or people having to isolate as close contacts.
"I think we can also expect to see behaviours change with more people likely to avoid going out. For most businesses, more certainty will be a great help, however the hospitality and events sectors will still bear the brunt in the coming months. Overall, we're expecting Omicron to have a much lesser, and shorter impact than previous major outbreaks."
The latest ASB Economic Forecast says the economy has shown impressive resilience to date, but headwinds are building, and growth is expected to be moderate across 2022.
Inflation and interest rates still on the rise
Inflation is at multi-decade highs in many OECD countries, and in New Zealand, reached almost 6% at the end of 2021 - the highest in more than 30 years.
The ASB Economic Forecast points to severe shipping constraints and other logistics challenges, as well as tightened labour markets as playing a part.
"The inflation outlook is still inherently uncertain," says Mr Tuffley. "We have revised up our inflation forecasts, but this could go higher again. We are predicting annual consumer price inflation to peak at around 6.5% in the coming few months, and it will likely stay around 4% for the rest of the year and above 3% until 2024."
"We expect the Reserve Bank will continue hiking the Official Cash Rate successively over the coming year to a peak of 2.75% early next year."
Consumer squeeze and a lift in business spending
Consumer spending and a buoyant housing market kept the economy ticking over last year, however the ASB Economic Forecast says consumer spending growth will dip this year. Conversely, businesses are likely to take advantage of more certainty from the government around the ongoing COVID response, and start investing in longer-term plans.
"We're going to see a consumer squeeze. Inflation is high, interest rates are going up and wages aren't keeping pace. So we are going to see a lid on consumer spending growth, and what we will see over time is growth coming more from business investment spending as well as continued high export prices," says Mr Tuffley.
"For businesses, there will be a lot less lurching from one extreme to the other so they can be more confident about business development and making longer-term plans, and investing to realise those plans."
The NZ dollar price of New Zealand's commodity exports, meanwhile, remains near its highest level in almost 30 years of ASB's commodity price index, led by continuing strength in dairy prices, and is expected to remain strong over the coming year despite logistics disruptions.
Housing pressure eases
For the first time in more than ten years, house prices are likely to drop this year, with ASB forecasting a decline of about 6% by the end of 2022.
Interest rate increases and tighter credit conditions are combining to dampen house buying enthusiasm, while supply has begun to increase significantly, easing some of the previous demand.
"Residential construction is booming and new listings are trending higher. This slackening in the market's supply/demand balance is eroding support for ongoing house price increases. We're already seeing this soften and this will continue over the coming year," says Mr Tuffley.
The latest ASB Quarterly Economic Forecast will be available online at https://www.asb.co.nz/documents/economic-research/quarterly-economic-forecasts.html
Other recent ASB reports covering a range of commentary can be accessed at our ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html