The latest announcement of community transmission of the Omicron variant of COVID-19 saw New Zealand enter the Red traffic light setting1to slow the spread of COVID-19. This latest development is a blow to many businesses just getting back on their feet after the prolonged lockdown in Auckland and some neighbouring regions. Even prior to the discovery of Omicron in the New Zealand community, the latest NZIER Quarterly Survey of Business Opinion (QSBO) showed a weakening in demand and business confidence. The latest survey ran from 8 November 2021 to 10 January 2022 and captured the effects of Auckland and its neighbouring regions in lockdown, as well as domestic and international border restrictions.
The NZIER QSBO showed a net 34 percent of firms expect a deterioration in general economic conditions over the coming months, while a net 1 percent reported a decline in activity in their own business in the December 2021 quarter. The impact of the COVID-19 outbreak and containment measures were widespread, with the manufacturing and services sectors feeling particularly downbeat.
Businesses more cautious
Heightened uncertainty over how community transmission of the Omicron variant will impact the New Zealand economy has made businesses even more cautious. This is reflected in businesses’ reduced appetite to invest, both in plant and machinery and buildings. Investment intentions for plant and machinery fell to its lowest level since September 2020, despite labour shortages being very acute.
As inflation pressures surge
Inflation pressures are rising sharply, reflecting large cost increases which businesses are passing onto customers by raising prices. The COVID-19 outbreak is driving capacity pressures in the New Zealand economy, as border restrictions limit the ability of firms to bring in workers from overseas and global supply chain disruptions affect the ability of firms to source materials for production and sale. Cost pressures are particularly intense in the construction and retail sector, with around 90 percent of firms in these sectors reporting higher costs in the December quarter.
Recent overseas experience shows the high transmissibility of the Omicron variant will exacerbate capacity pressures as community spread accelerates, as more workers will have to stay home to self-isolate or recover from infection. These supply constraints will further intensify cost pressures in the New Zealand economy over the coming year.
Pushing interest rate expectations up further
With annual Consumer Price Index (CPI) inflation heading towards 6 percent, there is a growing risk that longer-term inflation expectations will become unanchored from the Reserve Bank’s inflation target mid-point of 2 percent. This has stoked market expectations of further Official Cash Rate (OCR) increases from the central bank as it tries to rein in inflation pressures. However, over 60 percent of mortgages are on fixed rate mortgages which are not due for repricing for at least another 6 months. This means that the full effects of OCR increases on households will likely not be felt until later this year.