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Source: MIL-OSI Submissions
Source: ASB

Growing pains ahead for New Zealand’s ongoing economic recovery
The housing market is set to come off the boil. Inflation pressures are starting to lift, and ASB expects the OCR to increase from mid-2022.

There is light at the end of the COVID-19 tunnel, as economies around the world continue to rebound, however capacity constraints and pricing challenges loom, according to the latest ASB Economic Forecasts.

Globally, the roll-out of COVID-19 vaccine programmes has allowed economies to begin opening back up, setting the stage for above-average economic growth over 2021, with economic forecasts being revised up yet again in recent months.

Increased optimism for the global growth outlook has supported global commodity prices including for New Zealand exporters.

The vaccine rollout abroad and the re-opening of major economies are encouraging developments, but ASB chief economist Nick Tuffley says with global demand recovering and international trade flows picking up, freight demand remains extremely elevated, and high shipping costs and delays are one of the key challenges the country will face this year.

“A lot of the activity that didn’t take place over the first half of 2020 is taking place now, and has pushed shipping demand and global commodity prices higher as global demand for goods and services recover.”

On the plus side, recovering global demand has driven the ASB Commodities Index to near record highs (in USD terms), with dairy and fruit prices seeing large gains in recent months.

Over the past year house prices have lifted 27% and Tuffley says house price inflation is predicted to slow to 10% yoy by year end, with a further cooling to 5% by end 2022.

“The growing headwinds that have picked up over the past year, including the government tax changes, will slow investor demand and we may also start to see some natural slow down with house prices very high relative to incomes, and mortgage rates not likely to fall any lower,” says Mr Tuffley.

“The opening of the Trans-Tasman bubble means there is some good news on the horizon for the tourism and hospitality sector – while interest has been light so far, there are reports of increased interest from Australians to visit NZ during the winter – and the ski season in particular.”

While some sectors such as tourism and hospitality have faced obvious setbacks over the past year or so, others including the construction sector have been booming, with demand continuing to grow.

But meeting this strong demand is becoming an increasing challenge, and there are concerns about supply constraints across the board from the availability of skilled labour, to key raw materials.  

Global supply chain disruption is expected to continue throughout the year. Meanwhile, there are reports that ships are travelling off schedule and sometimes bypassing New Zealand given its isolation, which is further hindering the supply of key goods.

Cost pressures have begun to ramp up significantly in NZ, and these are expected to be passed on to consumers over the coming few months.

The labour market has recovered faster than expected and ASB expects to see a pick-up in wage growth over 2021.  However, growing wage and cost pressures will likely drive CPI inflation higher and the Reserve Bank of New Zealand has become more wary of inflation reaching the top end of its inflation target.

ASB expects the RBNZ to start lifting the Official Cash Rate from May next year, and rising interest rates will also help keep a lid on the pace of house price inflation.

“Overall, New Zealand has weathered the COVID-19 pandemic relatively well, and its economy has outperformed many of our main trading partners,” 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

MIL OSI