Accelerating omicron outbreak presents challenges to NZ recovery

Otautahi - The acceleration in the number of COVID-19 cases across New Zealand will weigh on the economic recovery over the coming year, according to the New Zealand Institute of Economic Research’s latest report. 

Despite the relaxation of restrictions for the fully vaccinated under the move to the Traffic Light system in December, there are signs of other changes in behaviour as people restrict their movements for fear of infection or having to self-isolate. 

This raises uncertainty over the recovery in services activity in New Zealand. The potential for widespread worker shortages due to illness or self-isolation presents a further challenge to the New Zealand economy more broadly. 

Offshore, the invasion of Ukraine by Russia adds to the uncertainty over the global growth outlook.  

The widening spread of the omicron covid outbreak and situation in Ukraine further heightens the uncertainty over the growth outlook ahead. 

Although the NZIER expects the resilient New Zealand economy to recover over the coming year, the additional challenges should weigh on the pace of this recovery. 

The continued surge in inflation, as supply chain disruptions and labour shortages drive up costs for households and businesses. Inflation pressures have been broad-based, as more businesses are able to pass on higher costs to customers by raising prices.

The global supply chain disruptions continue and the report looks at impact of the disruptions on the economic recovery abroad and in New Zealand.

The Reserve Bank has highlighted its concern about inflation expectations becoming unanchored given the sharp rise in inflation and wage expectations more recently.

As a result, the central bank has indicated it will continue to increase interest rates over the coming years, at a greater pace and degree than it forecast back in November last year.

NZIER expects the impact of higher interest rates on the economy will become more apparent later this year as households face repricing of their fixed rate mortgages and rein in their discretionary spending.

The overall developments point to a more protracted recovery in the New Zealand economy.