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Source: MIL-OSI Submissions
Source: ASB

New Zealand is expected to begin opening its borders in the first half of 2022 but will face ongoing domestic headwinds in its economic recovery.

Inflation is likely to near 6% (a thirty year high) by the end of this year and remain above 3% into 2023.
ASB expects the OCR to reach 2% which will have an impact on other interest rates.
Annual house price growth is sitting around 30% but predicted to slow to 22% this year and 2.5% by the end of 2022.

Traffic lights on the horizon are cause for cautious optimism, but economic scarring from the latest extended lockdown in Auckland is likely to be felt through to the first few months of next year according to the latest ASB Quarterly Economic Forecast.

Pressure on New Zealand’s beleaguered hospitality, events and tourism industries is expected to ease in the coming months, which will bolster economic recovery, however this will be against a backdrop of headwinds.

“We’re entering new territory for our COVID response, transitioning from a strategy of elimination to one of suppression, and learning to live with COVID,” says ASB chief economist Nick Tuffley.

“How quickly we move through this stage will depend on the level of pressure on the health system, but we expect to see restrictions start to loosen significantly in the first half of next year.

“2022 will have its share of challenges, and probably a tough start. But the year should finish with New Zealand stronger and in a far more resilient place to cope with the ongoing pandemic.”

The New Zealand economy is not expected to recover as quickly this time as it did following the first lockdown in 2020 with GDP is not predicted to return to mid-2021 levels until mid-2022.

Despite this, business confidence remains resilient, which Mr Tuffley says points to continued strong demand for employment and investment. Export activity is performing well, with annual import and export goods values hitting an all-time high as at the end of September and the ASB Commodities Index at an all-time high in October.

“Things are a bit tougher for services exports but we expect the borders to start re-opening incrementally in the first half of next year and should start to see sectors like international tourism and foreign education operating again, and life being a bit more normal,” says Mr Tuffley.

The labour market remains tight with unemployment falling to 3.4%, equal to the record low seen in 2007, just prior to the Global Financial Crisis. This, alongside global supply shortages, is taking an increasing toll on inflation, which is expected to reach almost 6% by the end of the year and remain above 3% into 2023.

“This spike will be the highest inflation we’ve seen since 1990 and we’ve already seen the Reserve Bank react by increasing the Official Cash Rate in October and again this week. We’re likely to see ongoing increases with the cash rate getting up to 2% by the end of next year, and if inflation pressures turn out to be more severe there’s always the risk that rates go higher.

“Cost increases in fuel, imported goods and housing materials will start to sting but we also expect wage growth to lift strongly in the coming year which should provide some respite for households’ finances.”

Housing construction demand is at record high levels and the annual pace of house price inflation is currently running at around 30% year on year. This is predicted to slow to 22% by the end of this year and 2.5% by the end of 2022.

“We’re now seeing increasing evidence of momentum cooling. Home lending has dropped from its prior break-neck rate. The pace of turnover has also eased up, aided by the shift up in alert levels in parts of the country. Most importantly, mortgage rates are now rising rapidly and we expect further lifts ahead,” says Mr Tuffley.

“Overall there’s definitely some positives in the coming months as we get more used to living with COVID, and we should start seeing New Zealand return to a new level of normality midway through next year.”

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