ASB’s Quarterly Economic Forecast: COVID Splutters; Inflation Heats Up; Labour Shortages Flare

Tuesday, 31 May 2022, 10:09 am
Press Release: ASB Bank

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• Omicron’s economic impact has been far milder than the 2020 and 2021 COVID outbreaks
• 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
• Further lifts in businesses’ capital spending are likely, but this and other productivity-boosting measures will take time to have an impact

Omicron’s mild bite offset by sluggish global growth
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.

“We believe the experience of recent months is a better reflection of the future for where we’re heading with COVID. Mobility’s increased, but we anticipate sluggish GDP growth over the first half of 2022 as high inflation, labour shortages and weakening global growth start to bite,” says ASB Chief Economist Nick Tuffley.

The latest ASB Economic Forecast anticipates growth around 1.5% per annum across 2022 and 2023.

Market favours jobseekers as labour demand shows little sign of deceleration

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.

“The employment uncertainties of the first wave of the pandemic are behind us,” says Mr Tuffley.

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

Inflation headaches abound
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.

“We’re rolling off the biggest housing boom since the 1970s,” says Mr Tuffley “Housing has clearly softened under the weight of tighter credit regulations, rising interest rates, and surging construction creating added supply.”

High inflation outcomes are expected to persist, with annual consumer price inflation forecast to peak at around 7% in the first half of 2022, remain above 5% over 2022 and stay above 3% until 2024.

ASB’s Quarterly Economic Outlook notes house prices are to fall around 12% in total, with around five percent of this drop already priced in. This forecast fall is slightly ahead of declines seen during the Global Financial Crisis, though in inflation-adjusted terms is larger (20% vs. 15%).

Bumpy ride through to 2024
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,” says Mr Tuffley.

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

“Looking ahead, we’re expecting capital spending to lift. Businesses need to start thinking strategically about both their people needs and access to future export markets and sources of imports. Investing in cost and labour-saving tech is an avenue forward-thinking companies may choose to explore at this time.”

The latest ASB Quarterly Economic Forecast is available online at: https://www.asb.co.nz/documents/economic-research/quarterly-economic-forecasts.html

Other recent ASB reports covering a range of commentary can be accessed at our ASB Economic Insights page: https://www.asb.co.nz/documents/economic-insights.html

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