Delta casts a shadow on the 2021 year
Christina Leung, Principal Economist and Head of the Auckland Office, NZIER
Michael Bealing, Principal Economist, NZIER
As we near the end of 2021, we take a look back at what has proven to be another rollercoaster of a year. The arrival of the Delta strain of COVID-19 in New Zealand and subsequent community transmission brought with it lockdown restrictions, which for Auckland and some neighbouring regions turned out to be very prolonged. 2nd December marked the end of the COIVD-19 Alert System as New Zealand transitioned to a traffic light system, but not before Auckland had spent 107 days in Alert Levels 4 and 3.
While the restrictions have been tough for households and businesses, the latest release of the September quarter GDP data indicated the impact on the economy was not as bad as initially feared. Stats NZ estimated economic activity declined by 3.7 percent over the quarter – less than the 7 percent estimated by the Reserve Bank in its November Monetary Policy Statement (MPS). The September quarter outturn indicates the New Zealand economy is resilient, with many businesses adapting to operating under the restrictions and households still willing to spend. Nonetheless, with the lockdown extending into December for Auckland and some neighbouring regions, we are unlikely to see the sharp V-shaped bounce-back in activity, as was the case following the last major lockdown in 2020.
Omicron provides an uncertain outlook for 2022
The emergence of the new Omicron variant, and the latest announcement of its arrival in New Zealand, points to an uncertain outlook for 2022. In particular, there is uncertainty over the reopening of New Zealand’s borders with the rest of the world. The Government has indicated it will await further details on this new variant of COVID-19 before making a decision on whether changes will be required to its plans allowing for self-isolation for arrivals into New Zealand. Regardless of any changes to managed isolation requirements, this heightened uncertainty will likely drive increased caution amongst households and businesses towards spending and investment.
Higher interest rates still on the way
Despite this negative development, inflation pressures remain strong. This largely reflects continued capacity constraints in the New Zealand economy. Labour shortages remain acute given the difficulty businesses face in bringing in workers from overseas, while the pandemic continues to cause supply chain disruptions around the world. With resilient demand meaning businesses are finding it easier to pass on higher costs to customers by raising prices, inflation pressures have picked up. The Reserve Bank will be mindful of the risk of a wage-price spiral should inflation expectations become unanchored. We expect the Reserve Bank will continue to raise interest rates to rein in inflation pressures over the coming year.
New domestic travel freedoms welcomed
As we head into the holiday season, the opening of the Auckland borders mean a chance for family and friends to be reunited. We wish everyone a safe and festive break and we are looking forward to seeing what the new year brings.
