Three Factors Making New Zealand’s Return To Normalcy Slower

Monday, 2 May 2022, 5:27 pm
Opinion: Kalkine

Summary

• A range of market forces is disrupting New Zealand’s path to economic recovery.
• Inflation has increased cost-of-living pressures in the country, making economic disparity wider among the wealthier and low-income sections.
• The tourism industry, which is an integral part of the New Zealand economy, is yet to pick up.

Although New Zealand has fought COVID-19 better than most economies, the never-ending economic hardships seem to be acting against the country’s return to normalcy. Even as the adverse effects of the pandemic fade away, many other issues have emerged that are slowing down its economic growth. Most of these factors stem from international events, so little can be done to eliminate them.

By the end of 2021, the New Zealand economy was in a favourable position as the economic recovery took off rapidly. However, this period of stability was short-lived as soon a supply-chain crisis ensued in the global economy.

Following the Russia-Ukraine war, a range of worrying events has unfolded, which call for swift action from policymakers. In the aftermath of all these events, the economy seems farther away from its initial goal of reaching the pre-pandemic normal.

Against this backdrop, let us discuss three factors that are making the country’s return to normalcy slower:

GOOD READ: Why is NZ’s business sentiment low despite partial lift in restrictions?

1. Cost-of-living crisis

As the world economy entered the second quarter of calendar 2022, it has become synonymous with rising inflation. New Zealand is also in the same boat as many other countries, with the nation possibly observing the harshest cost of living crisis ever. Those belonging to lower-income households have seen the worst of it, as prices of everyday items take a steep turn upward.

However, inflation is not the end of the story, as it has piled up on top of many existing problems. Declining housing affordability, COVID-related disruptions, failing infrastructure and an inadequate healthcare system are some other issues plaguing New Zealand.

While the wealthier individuals have fared substantially well even in the face of this crisis, the disparity between the rich and the weaker section is increasing. Add to that multiple interest rate hikes by the Reserve Bank, and the difficulties worsen. The aggressive monetary policy tightening has put tremendous pressure on the government to solve the existing problem.

1. Sluggish economic growth

The Russia-Ukraine war has pushed New Zealand closer to a tipping point, beyond which an economic slowdown seems imminent. As inflationary pressures add up, there is an increased possibility of a decline in consumer spending. Concerns loom that a lack of demand for goods and services could foster a slower economic growth this year, much like what was experienced during the first lockdown.

Interest rate hikes have further weakened the outlook for investment and big purchases by households. As daily expenses and mortgage payments start digging into household incomes, individuals might have to re-assess their expenditures on daily items and reduce them.

Over the last few months, the Reserve Bank of New Zealand has announced unexpectedly high-interest rate rises to curb elevated inflation. The central bank has embraced rapid tightening while acknowledging signs of an economic slowdown. Additionally, rising interest rates have hit consumer and business confidence harder, fuelling fears of an economic slowdown.

1. Slower rebound in tourism

A crucial aspect of any economy that is back to its pre-pandemic self is a rebound in international tourism. New Zealand is yet to reach this benchmark as tourism prospects still seem bleak for the nation. This is because of COVID-specific travel regulations, which were one of the toughest in the country.

The creation of an artificial bubble has secluded New Zealand from the rest of the world long enough to worry about the reopening of borders. While a delayed opening has been a surefire way to control new virus cases, it has put New Zealand at the back of the line in tourists’ destination lists.

On the other hand, the reopening of Australia has been met with a much more emphatic response. Cruise operators in New Zealand worry that the industry may not see a revival for a long time. Thus, an integral sector of the national economy seems to be in dire need of restoration.

As the year progresses, these market forces could change for the better. However, going by the current scenario, the chances of such a resurgence in economic growth seem less. With inflation being the primary issue, nothing can be accurately forecasted until unsettling international events take a backseat.

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