The emergence of a new COVID-19 variant indicates rockier recovery ahead - Quarterly Predictions December 2021

The recent emergence of the new COVID-19 variant Omicron highlights just how quickly conditions can change. Before this discovery, New Zealand was already grappling with the inevitable community spread of COVID-19 as restrictions are relaxed from December. By the time New Zealand moves to the new traffic light system on Friday, 3 December, Auckland would have spent 107 days in either Alert Level 3 or Alert Level 4 – a much more prolonged period of time under severe restrictions than the lockdown last year.

Principal Economist Christina Leung says, “Recent developments point to a tougher path for the New Zealand economic recovery ahead. Nonetheless, we expect the resilience of the New Zealand economy will underpin a recovery in activity over the coming year, albeit with a more cautious tone”.

Inflation pressures are very strong

Christina Leung notes that inflation pressures have intensified in recent months, largely reflecting acute capacity pressures in the New Zealand economy. Port congestion and shipping delays have led to supply chain disruptions, while border restrictions are contributing to labour shortages.

“Costs have accelerated for many businesses, but they have generally been able to pass some of these cost increases to customers by raising prices. The lift in inflation expectations more recently highlights the risk that high inflation will persist over the coming years.”

Reserve Bank will be cautious with further tightening

“The Reserve Bank will be wary about inflation expectations becoming unanchored, resulting in a wage-price spiral”, says Leung.

“However, the central bank will be balancing the need to keep inflation in check with the very uncertain environment presented by new variants of COVID-19 that will emerge. For now, we still expect the Reserve Bank will continue to increase interest rates over the coming year but expect it will approach this with caution. We have pencilled in a follow-up OCR increase for the February meeting and two more later in 2022. As households face repricing of their fixed rate mortgages next year, the impact of interest rate increases on the economy will become more apparent.”

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

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.