There are positives and negatives in the latest ASB Quarterly Economic Forecast as New Zealand continues to bounce back strongly from COVID-19. The closed border is putting additional strain on the country’s labour market with ASB warning the impacts could last several years.
Demand for new employees has surged further over the first half of 2021, with the number of job ads far exceeding pre-COVID levels and unemployment back down to 4%, its pre-COVID rate. This coincides with the NZIER’s most recent Quarterly Survey of Business Opinion which found difficulty in finding staff was the highest it has been in 45 years.
"We've hit growing pains,” says ASB chief economist Nick Tuffley. "The economy has done surprisingly well through COVID and business is booming with no shortage of people wanting to spend money. The big challenge for businesses is finding enough people to keep the doors open and the lights on."
Mr Tuffley says the labour shortage is creating bottlenecks across the board, regardless of region or sector, although construction in particular was feeling the effects in combination with materials supply shortages.
"As one example of the challenges, New Zealand is trying to build houses, commercial buildings and a range of infrastructure projects all at the same time, and everyone is competing for the same people. We're already seeing the flow-on effects of these shortages – in Q2 we saw the greatest quarterly jump in the cost of building a new home since 1987."
He says there is also a question mark around whether the country will benefit from an influx of New Zealanders coming back from across the ditch or whether we will lose people to Australia, which is suffering from the same skill shortages but typically pays much higher wages.
Labour pains alongside global supply shortages are also taking a toll on inflation, which spiked to 3.3 percent in the June quarter. Inflation is set to hit 4 percent before settling around 2 to 2.5 percent. This spike will be the highest the country's inflation rate has reached in almost a decade and has already seen the RBNZ hint it will increase the Official Cash Rate from this month.
This spike has largely been driven by increases in fuel and housing costs, however, Mr Tuffley says cost pressures are wide-reaching with imported items in particular shooting up in price.
"There's definitely a lot of cost pressure coming through and it’s right across the board. The message for business is to really focus on retention because there’s a lot of competition for good people.
"We're expecting to see more flexibility in recruitment requirements and businesses being more open to on-the-job training to build people’s skills up while we remain in a closed environment with limited migration. It's also a good time to be looking at technological alternatives over the coming few years whilst finding staff remains a challenge. Businesses are going to need to adapt more generally to an environment of broad-based cost pressures.
While the increased cost of living will erode the purchasing power of incomes, there is likely to be some offset from higher wages and higher deposit rates as interest rates rise in general.
"If you're a borrower you do need to really start thinking about interest rates and what your exposure is and your risk appetite for dealing with higher interest rates. On the flip side there's some light at the end of the tunnel for depositors."
Globally there's optimism as the vaccine roll-out races ahead but this is tempered somewhat by vaccine delays in developing countries as well as spread of the Delta variant of COVID and the cautionary tale that Australia presents.
"We're still facing the risk there could be further lockdowns but by and large the world is in a reasonable place."
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