The discovery of COVID-19 community transmission changes the near-term outlook - Quarterly Predictions, September 2021

31 August 2021

For immediate release

The discovery of a COVID-19 community outbreak on the 17th of August brought a halt to the robust recovery that had been taking place in New Zealand. With most of New Zealand sent home under Alert Level 4, economic activity has again slowed sharply.

Principal Economist Christina Leung says, “The latest outbreak and containment measures will slow the New Zealand economy in the near term. However, the events of the past year have shown us that the New Zealand economy is resilient and responsive to fiscal and monetary policy stimulus. The quicker community transmission is contained, and New Zealand moves down the alert levels, the shorter this sharp shock to the economy will be”.

Likely to exacerbate supply constraints and intensify inflation pressures

Christina Leung notes the latest outbreak will likely see supply constraints in the New Zealand economy become more acute, reflecting the reduction in the workforce as affected staff self-isolate and social distancing restrictions reducing the operating capacity of businesses.

“Even before this latest outbreak, businesses had found it difficult to hire staff and source inventory for production and to restock shelves. These supply constraints will only get worse. What is not as clear is the longer-term impact on demand, which will be a key influence on how persistent inflation pressures turn out to be. The strong bounce-back in activity over the past year suggest the New Zealand economy is resilient and that businesses will be able to pass on higher costs by raising prices.”

Higher interest rates are still on the way

“With inflation pressures likely to intensify, the Reserve Bank will be keen to get on with raising interest rates”, says Leung.

“The Reserve Bank has made it clear that were it not for the discovery of a COVID-19 community case and announcement of lockdown the previous day, it would have raised the OCR at the August meeting. This indicates that barring a prolonged outbreak where severe restrictions remain in place for New Zealand, which starts to have a longer-term negative impact on demand, interest rate rises are likely over the coming year. We have pencilled in an OCR increase for the October meeting, but this will be dependent on how the outbreak evolves over the coming weeks. Beyond this near-term uncertainty, interest rates will be rising over the coming years.”

Quarterly Predictions is an independent review of New Zealand’s economic outlook and includes comprehensive forecasts of the economy. The full publication is available exclusively to NZIER’s members.

For further information, please contact:
Christina Leung, Principal Economist & Head of Membership Services
christina.leung@nzier.org.nz, 021 992 985

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