Decoding The Risks Facing The New Zealand Economy

Friday, 11 February 2022, 5:25 pm
Press Release: Kalkine

Summary

• The extent of the damage the Omicron variant can cause to the NZ economy is not known yet.
• The elevated price levels remain a threat to first-time homebuyers and potential sellers in the property market.
• Tourism operators are worried that they might lose their market share to Australia owing to a delay in NZ’s border reopening.

Although the New Zealand (NZ) economy has fought the COVID-19 battle better than several other countries, a range of factors can make its 2022 journey challenging. The uncertainty surrounding the impact of the Omicron variant has clouded the country’s outlook. With COVID curbs still being maintained in the country, it is facing a stress test in terms of economic recovery.

On the positive side, experts are relieved that the national debt in the economy is much less relative to many other nations. Effectively, the New Zealand bank balance has emerged as one of the strongest globally, adding some respite to the country’s recovery. Experts are hopeful that existing funds will be sufficient in helping the country navigate through doubt-infused periods while allowing it to reach pre-pandemic levels of growth.

Even though the economy appears better placed than it was during the first wave, economists continue to express uncertainty over the country’s future. In this backdrop, let us discuss some key risks facing the New Zealand economy:

Property market crash

In its recent economic survey, the Organisation of Economic Cooperation and Development (OECD) stated that the New Zealand economy is now overheating. Prices have reached insurmountable levels across all industries in the country, with the real estate market being the biggest testament of inflation. The stimulus infused environment has pushed housing prices to new highs amid strong demand and subdued supply.

These elevated price levels remain a threat to first-time homebuyers and potential sellers in the property market. As the economy corrects itself to the pre-pandemic state, housing prices are expected to follow suit and reach more palatable levels. However, the major concern pertains to prices crashing down to unpleasant lows. Fear of a property market crash is looming due to rising interest rates, easing housing shortage and stricter prudential policies.

Notably, falling prices can land more gracefully if affordability improves across the economy. With COVID relief measures being slowly withdrawn out of the economy, affordability concerns might widen in the housing sector. Meanwhile, reintroducing stimulatory measures can be of less help as the economy already seems overheated.

GOOD READ: Kiwis fret as fuel prices reach $3 per litre

Delays in border reopening

Border reopening has become a sensitive topic in the COVID-19 era. The unprecedented route taken by the virus has disrupted existing policy plans for a return to normalcy. Thus, the government is facing difficulty in establishing a definite time frame within which it will be optimum to open international borders.

New Zealand may also opt to open its aviation channels for vaccinated tourists in the coming months, taking cues from neighbouring countries. For instance, Australia has announced border reopening from 21 February onwards, taking NZ tourism operators by surprise. Tourism operators are worried that they might lose their market share to Australia owing to a delay in NZ’s border reopening. More importantly, the country can miss out on skilled workers, who can ease the existing labour supply problem.

Such concerns have become more rampant, with other economies opening their doors to the skilled workforce and immigrating students. Specifically, experts fear that the emigration rate might rise in the domestic country if other nations start welcoming foreign citizens.

GOOD READ: New Zealand announces plans for phased border opening

Worker absenteeism

Worker absenteeism or a dearth of workers was a quite unheard phenomenon in New Zealand before the pandemic ensued. Currently, there is a large-scale undersupply of labour in sectors like construction, logistics and supermarket operations. The economy has been experiencing a widespread raw material shortage, which has already halted some business operations.

Amidst such supply chain shortages and a growing dearth of skilled workers, local businesses are at risk of becoming incapacitated in the coming months. The COVID-induced restrictions already in place have been fuelling tightness in the labour market, which can worsen in case additional restrictions are placed to curb the virus spread.

Moreover, self-imposed restrictions have become a growing trend, leading to worker absenteeism. People are shying away from stepping out for work or choosing less risky ventures simply to avoid contracting the virus. In a way, the economy is facing the threat of an “artificial lockdown” imposed by citizens.

All in all, Omicron fears have transpired into a set of concerns, which can hamper economic growth. With the population becoming increasingly cautious of stepping out, supply-chain dynamics can go south. However, a severe lack of workers may prompt some businesses to increase wages, bringing affordability back into the economy.

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