Slow recovery, no lockdown rebound – ASB

Learning to live with Covid should lead to a more predictable economic recovery next year, ASB’s economists say, but there won’t be the sharp rebound that was seen after last year’s lockdowns.

The bank has released its latest quarterly economic forecast.

It said the latest Covid outbreak had disrupted New Zealand’s strong economic performance and there would be a significant contraction recorded in the next gross domestic product (GDP) update.

But from the start of next year, things were likely to improve. Chief economist Nick Tuffley expected growth of 4 per cent over the 12 months of 2022.

‘‘The first half of next year will be clawing back the losses we’ve made during lockdowns.’’

He said the new traffic light system to manage Covid-19 would allow businesses to more easily predict the future, particularly the hospitality, events and entertainment sectors that had been hard hit.

While there were likely to be periods of tighter restrictions, he said the country would probably be able to avoid a repeat of an immediate shift from level 1 to level 4, as seen when the Delta variant was first detected in Auckland in August.

The next few months were unknown, he said, and could be ‘‘quite bumpy’’ as the first wave of Covid swept the country.

Once it was seen how badly that affected the health system, it would be easier to predict what the future would look like, he said.

‘‘Once the first wave of Covid has passed, life will be more settled. Lighter restrictions will be used to contain the Covid load on the health system. Life and commerce will once more be relatively free, and broad economic recovery will get under way. Nevertheless, there will be a degree of economic scarring, particularly in hospitality, entertainment, and other services requiring close contact.’’

He said ASB did not expect GDP to return to its mid-2021 level until mid-2022.

‘‘We’re entering new territory for our Covid response, transitioning from a strategy of elimination to one of suppression, and learning to live with Covid,’’ he said.

‘‘2022 will have its share of challenges, and probably a tough start. But the year should finish with New Zealand stronger and in a far more resilient place to cope with the ongoing pandemic.’’

Business confidence remains resilient, which Tuffley said reflected strong demand for employment and investment.

Export activity was performing well. ‘‘Things are a bit tougher for services exports, but we expect the borders to start reopening incrementally in the first half of next year and should start to see sectors like international tourism and foreign education operating again,’’ he said.

Unemployment had fallen to 3.4 per cent as demand for new employees was unmet owing to border restrictions.

Tuffley said that, and global supply shortages, would push inflation to almost 6 per cent by the end of the year, and above 3 per cent in 2023.

‘‘This spike will be the highest inflation we’ve seen since 1990 and we’ve already seen the Reserve Bank react by increasing the official cash rate in October and again this week.

‘‘We’re likely to see ongoing increases, with the cash rate getting up to 2 per cent by the end of next year, and if inflation pressures turn out to be more severe there is always the risk that rates go higher. Cost increases in fuel, imported goods and housing materials will start to sting, but we also expect wage growth to lift strongly in the coming year.’’

He expected house price growth to slow from its current rate of 30 per cent to 22 per cent by the end of this year and 2.5 per cent by the end of next year.

‘‘Home lending has dropped from its prior breakneck rate. The pace of turnover has also eased up, aided by the shift up in alert levels in parts of the country . . . Mortgage rates are now rising rapidly and we expect further lifts ahead.

‘‘Overall there’s definitely some positives in the coming months as we get more used to living with Covid, and we should start seeing New Zealand return to a new level of normality midway through next year.’’

‘‘Cost increases in fuel, imported goods and housing materials will start to sting, but we also expect wage growth to lift strongly in the coming year.’’

Nick Tuffley

ASB chief economist