2022 Is Here; What To Expect From The New Zealand Economy?

Wednesday, 12 January 2022, 6:36 am
Press Release: Kalkine

Summary

• The relatively better-adjusted economy might bring some relief in 2022, even as the new Omicron variant continues to spread in New Zealand.
• The RBNZ’s hawkish policies do not resonate with the central bank policies across other advanced countries.
• The fear of increased containment measures and border closures have prompted a decline in consumer confidence.

With the nature and intensity of the new Omicron variant largely unknown, many believe that the world is standing at ground zero. Though that is partially true, one can safely assume that 2020-2021 has been a great learning period for economies worldwide. However, the new year is riddled with virus-driven uncertainty, with ambiguity around how people would live with the pandemic in 2022. While the country might have to face murky waters again, experts foresee a relatively better-adjusted economy in 2022.

As the economy advances into another year, economists are concerned about a persistent lack of immigrants due to the new variant, which might curtail the ongoing recovery. The situation could become bleaker if more people decide to leave the country than those who enter. One cannot neglect that some slowdown had seeped into the economy due to the Delta variant in the past, which might continue with the Omicron variant. In a way, several factors are shaping an uncertain view for the new year.

At the same time, the government instilled measures are offering a ray of hope against the perplexing outlook for the economy. In September 2021, the government rolled out fast-track residency for 165,000 migrants on temporary work visas. The move is expected to ease some difficulties COVID-19 and closed borders have caused the migrant community while supporting economic growth. Though the speed of growth might be less than desirable, experts suggest that the economic outlook for New Zealand tilts more on the positive side.

A change in RBNZ policies ahead?

The policy outlook of the Reserve Bank of New Zealand (RBNZ) seems to be once again locked in a gestation period, with the central authority examining different economic forces. The next few months are expected to be an observational period, wherein changing headwinds could induce major policy changes in the economy.

During the pandemic, the RBNZ’s rate hike policies have been taken with a grain of salt, especially because they did not resonate with the central bank policies across other advanced countries. Experts suggest that higher-than-average interest rate hikes by the central bank could make the cost of capital more expensive, leading to an even slower economic recovery.

While the central bank has been raising interest rates to control the price pressures, certain experts believe that higher prices could sometimes cure growing inflation. To be more precise, the economy could witness a contraction in demand when price pressures are too high, and inflation could ultimately turn out to be transitory. In such a scenario, an interest rate increase could worsen the situation eventually.

At present, one can see a divergence in the interest rates between Kiwiland and other economies. With interest rates in New Zealand gradually surging, one can expect the demand for the domestic currency to increase in the near future. If the RBNZ remains hawkish, New Zealand’s currency could continue to float upwards amid the flow of funds from low-interest-rate currency towards high-interest rate NZD.

Do Not Miss: Where do we see NZ interest rates going from here?

The future in a rear-view mirror

New Zealand shifted its purview on the virus after embracing a strategy of living with the virus instead of eliminating it. The change in perspective has paved the way for a better response from New Zealand regarding the possible future streams. As per PM Jacinda Ardern, the country is well-prepared to track new variants that may arise in the future. Incorporating the chances of an additional outbreak can help the government shape policies with a broader outlook.

However, it comes with the additional responsibility of implementing containment measures and keeping cases in check. With the rising cases of the Omicron variant, restrictions and containment measures might once again make their way back into daily life. The fear of potential restrictions and curbs has already prompted a fall in consumer sentiment. Depleting confidence has emerged in line with the change in New Zealand’s strategy to fight COVID-19. Meanwhile, increased lockdowns have directly affected the ability of consumers to see a positive outlook for the coming year.

Fears loom that the economy might reach knee-deep into a crisis if the central bank continues to walk on the path of hiking interest rates. Even as the RBNZ adopts measures to control inflationary pressures, the property markets remain red-hot with soaring housing prices. It remains to be seen if the RBNZ will bring its policies in line with the global environment to stabilise exchange rates without losing focus on the persisting issue of declining consumer confidence. It appears the economy has come full circle, even though much is different this time around.

Good Read: 4 financial moves to make before the year ends

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