Media Release: Household resilience flagging as Omicron hits
The emergence of Omicron promises that 2022 will be another year of disruption for the New Zealand economy. The latest forecasts published by Infometrics show the Red “traffic light” setting knocking 1-2 percentage points off GDP during the first half of this year. Alongside government restrictions on the hospitality and events sector, spiking case numbers are likely to increase households’ Hesitancy Of Going Out (HOGO) and result in softer economic outcomes, as suggested by recent falls in consumer confidence.
“The resilience of household spending continues to be a key factor underpinning New Zealand’s good economic performance throughout COVID-19 and contributes to a robust outlook,” says Infometrics Chief Forecaster Gareth Kiernan. “But the tailwinds that have supported strong spending outcomes throughout 2020 and 2021 are dying out, and consumers will be less able to drive economic growth to the same extent during the next two years.”
Household budgets are being squeezed by rising prices across the board, with inflation of almost 6%pa running well ahead of wage growth, at 3.8%pa. A 30% surge in petrol prices is particularly noteworthy, while price increases for other essentials, such as food and rent, have accelerated as well. With mortgage rates set to finish this year more than two percentage points higher than they were 18 months ago, and the official cash rate set to reach 2.75% in 2023, mortgage repayments are also rapidly increasing.
“Changes to the Credit Contracts and Consumer Finance Act appear to have been an unintended catalyst for the government’s sought-after housing market slowdown,” says Mr Kiernan. “The apparent credit crunch caused by these changes has proven to be more effective than tougher tax rules for investors, increased loan-to-value ratio requirements, or rising interest rates. We expect house price growth to slip below 5%pa by the end of 2022, which will take further heat out of consumer spending.”
Residential consent numbers are at record highs, indicating a strong supply of new homes that will become available over the next year. However, these increases in the housing stock are simply making up for significant underbuilding throughout the second half of last decade, meaning that a major oversupply of housing seems unlikely. Infometrics expects any house price falls to be limited, with few forced sales, meaning that housing will remain highly unaffordable for potential first-home buyers.
“Most critically for the housing market and broader economy, the labour market is set to remain tight during the next three years,” says Mr Kiernan. “We forecast that the unemployment rate will hold below 4% until the end of 2024, even with the borders starting to reopen and immigration starting to pick up later this year. Workers are in a strong position to ask for larger wage increases, but this trend will further add to cost pressures for businesses. Labour shortages will be an increasing constraint on the economy, and these limitations will contribute to economic growth slipping below 2%pa during 2024.”