- Omicron’s economic impact has been much milder than the COVID outbreaks of 2020 and 2021
- Labor markets are exceptionally tight, with labor shortages the highest since the 1970s
- Borrowers are currently bearing the brunt of the fight against inflation, but rate cuts to a more neutral level will occur – potentially from 2024
- Further increases in business capital spending are likely, but this and other productivity boosts will take time to have an impact
Omicron’s light bite is offset by sluggish global growth
The economic impact of Omicron has been much milder than that of previous COVID outbreaks. High national vaccination rates and a fundamental shift in government response mean the economy is far less disrupted by the current outbreak compared to the 2020 and 2021 lockdowns.
“We believe that the experience of the past few months better reflects the future direction we are taking with COVID. Mobility has increased, but we expect weak GDP growth in the first half of 2022 while high inflation , labor shortages and weakening global growth are beginning to take their toll,” says SBA Chief Economist Nick Tuffley.
The SBA’s latest economic forecast predicts growth of around 1.5% per year in 2022 and 2023.
Market favors job seekers as labor demand shows few signs of slowing
Job seekers, rather than employers, are in the driver’s seat as labor shortages continue to be felt, with the SBA’s economic forecast indicating that wage growth is set to strengthen in 2022 as companies seek to attract and retain talent.
“The employment uncertainties of the first wave of the pandemic are behind us,” says Mr Tuffley.
“For forward-looking organizations, now is the time to build back stronger by investing in people, whether through career development opportunities or compensation. As our borders now reopen, net immigration is unlikely to experience a modest recovery before 2023, meaning labor availability will continue to hamper business growth.
Inflation headaches abound
Households are feeling the impact of high inflation as spending growth is constrained by shrinking real incomes, weaker balance sheets and the tightening of the mortgage belt and rising cost of basic necessities crowding out discretionary spending .
“We are having the biggest real estate boom since the 1970s,” says Mr Tuffley. “Housing has clearly weakened under the weight of tighter credit regulation, rising interest rates and booming construction, creating additional supply.”
The high inflation performance is expected to persist, with annual consumer price inflation expected to peak at around 7% in the first half of 2022, remain above 5% in 2022 and remain above 3% through 2024.
ASB’s quarterly economic outlook indicates house prices are expected to fall by around 12% in total, with around 5% of that decline already priced in. (20% versus 15%).
Bumpy ride to 2024
As New Zealand emerges from the COVID frying pan, new economic fires in the form of inflation, supply chains and labor issues have intensified and will persist.
“The construction sector has been a beacon child for supply chain, goods inflation and labor issues impacting Kiwi businesses. While we believe supply chain issues will begin to unravel from next year, the conflict in Ukraine and ongoing COVID lockdowns in China prolong the current pain,” Mr. Tuffley said.
Borrowers will continue to bear the brunt of inflation, but rate cuts to a more neutral level will occur, potentially as early as 2024.
“Going forward, we expect capital spending to increase. Companies need to start thinking strategically about both their staffing needs and access to future export markets and import sources. Investing in cost- and labor-saving technologies is one avenue forward-thinking companies can choose to explore right now. »
The latest ASB quarterly economic forecasts are available online at: https://www.asb.co.nz/documents/economic-research/quarterly-economic-forecasts.html
Other recent ASB reports covering a range of insights can be found on our ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html
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