This month we hosted a webinar with Christina Leung, Principal Economist at NZIER, to discuss how happenings in the global economy are impacting New Zealand. Here’s a rundown of our Q&A session with Christina with the latest projections.
What are the economic impacts of omicron and what does this mean for our economic future?
On the demand side, despite relaxing Covid restrictions late last year, we’re still seeing Kiwis restrict their movements due to self-isolation requirements and risk of infection. Hospitality, particularly in city centres, are being impacted as more people choose to work from home.
Look to supply, we’re seeing shortages both from a worker perspective but also a supply chain perspective. Increasing numbers of our workforce are testing positive for Covid or must self-isolate, meaning businesses are under the pump. Meanwhile, supply chain shortages and port congestion impacts businesses sourcing stock and materials.
At a broader level, the heightened uncertainty over how the Omicron outbreak will play out has dented both business and consumer confidence. Uncertainty makes it that much harder to plan, which makes businesses and households more cautious about spending and investment.
What do you see for the future of supply chain construction? Southern Cross’ construction partners say things are ticking along well, but we’re hearing other stories in the media.
Supply chain disruptions mentioned earlier are affecting building material supply, which along with labour shortages has pushed up construction cost inflation. Residential construction cost inflation is particularly strong, indicating this part of the construction sector is where capacity constraints are most acute.
Our NZIER Quarterly Survey of Business Opinion shows that materials and supplies has become a major constraint for more building sector firms, with almost 23% now naming that as the primary constraint on their business – quite a jump from the 2% naming materials as the primary constraint earlier in 2021. But this pales in comparison to the 45% of retailers naming materials as the primary constraint on their business in the December quarter.
So, those building sector firms that were able to plan ahead and stockpile some materials have been more resilient in the face of supply chain disruptions.
What are you forecasting in terms of inflation and what does this mean for bank deposit and interest rates ahead?
We forecast annual CPI inflation to rise above 6% over the coming year, reflecting a broad-based increase in prices including food and fuel. There had been discussion of inflation rising above 7% given the recent surge in fuel prices, but with the Government’s latest announcement of a 25c cut in fuel exercise taxes for at least 3 months this will reduce headline inflation.
Leaving fuel prices aside, we are in a higher inflation environment, and with inflation likely to remain well above the Reserve Bank’s inflation target band of 1% to 3%, higher interest rates are likely over the coming year.
Although inflation is undoubtedly strong, we expect to see a more gradual tightening from later this year as around 60% of mortgages are due to re-fix interest rates, along with the forecasted OCR to reach 2.5% by middle of next year. Those rolling off 2% fixed mortgage rates will need to adjust to a rate with a 4% or 5% handle on it, so we expect households will likely rein in discretionary spending in the face of these higher mortgage repayments.
To hear the full Q&A, listen to the webinar at this link here. If you have any questions or want to understand more about any of the above topics, feel free to contact us on 0800 00 58 43 or investments@scpartners.co.nz