Covid splutters; inflation heats up; labour shortages flare

Tāmaki Makaurau - Omicron’s economic impact has been far milder so far this year than the than the 2020 and 2021 covid outbreaks, the ASB says in its latest economic report.

Labour markets are exceptionally tight, with labour shortages the most elevated since the 1970s.  

Borrowers are currently bearing the brunt of combatting inflation, but rate cuts to a more neutral level will happen, potentially from 2024, the report says.    

Further lifts in businesses’ capital spending are likely, but this and other productivity-boosting measures will take time to have an impact.

Omicron’s economic impact has been far milder than that of previous covid outbreaks. High national vaccination rates and a fundamental shift in response from the government means the economy is being far less disrupted by the current outbreak compared with the lockdowns of 2020 and 2021.

The latest ASB forecast anticipates growth around 1.5 percent per annum across 2022 and 2023.

Jobseekers, rather than employers, are in the driver’s seat as labour shortages continue to bite, with the ASB Economic Forecast indicating wage growth is expected to strengthen across 2022 as businesses seek to attract and retain talent.

For organisations with an eye to the future, now is the time to build back stronger by investing in people, be it through career development opportunities or remuneration.

While the borders are reopening, net immigration is unlikely to stage a modest recovery until 2023, meaning labour availability will continue to constrain business growth.”  

Households are feeling the impact of high inflation, with spending growth being constrained by reduced real incomes, weaker balance sheets and the squeeze on the mortgage belt and rising cost of essentials crowding out discretionary spending.

Aotearoa is rolling off the biggest housing boom since the 1970s. Housing has clearly softened under the weight of tighter credit regulations, rising interest rates, and surging construction creating added supply.

As New Zealand emerges from the covid frying pan, new economic fires in the form of inflation, supply chain and labour challenges have intensified and will persist. 

The construction sector’s been a poster child for the supply chain, goods inflation and labour issues impacting Kiwi businesses. While we believe supply chain snags will start untangling from next year, the Ukraine conflict and China’s ongoing covid lockdowns are prolonging current pain.

Borrowers will continue bearing the brunt of inflation, but rate cuts to a more neutral level will come, potentially as soon as 2024.