No recovery for tourism this year, Westpac says

Monday, 21 February 2022

There will be no recovery for tourism this year, Westpac economists say.

The bank’s latest Economic Overview forecasts say self-isolation requirements remain too prohibitive for all but a handful of visitors.

Westpac acting chief economist Michael Gordon said visitors staying longer, including international students and migrants, would likely return in greater numbers, but the country’s previously-largest export earner was not expected to make any such recovery.

But there would be a silver lining to this continued absence, because the lack of tourists would mean less demand for everyday goods like food and petrol, which could help keep inflation rates in check.

**READ MORE:

* Bigger house price falls expected, but not a crash, commentators say

* Economic confidence in Canterbury takes a tumble but expected to rebound in 2022

* Westpac does not expect house prices to drop until late 2022

**

Annual inflation hit 5.9 per cent in the December quarter, its highest level since June 1990.

However, those same inflation rates would be a key driver for the Government and Reserve Bank to reduce monetary stimulus, and without these, the impacts of low tourism may be felt far harder than they had to-date, Gordon said.

Another worrying trend highlighted in the Economic Overview was wage prices inflation. Previously an issue for those recruiting in specialised roles, Westpac now says wage inflation is likely to spread to more general roles as well.

“We expect wage increases will become increasingly widespread over the coming year as the tight jobs market allows workers to press the case for cost-of-living adjustments (or more),” the report said.

Gordon said if wage rise demands became too rife, producers would have to recover the costs by increasing the costs of their goods, which could lead to more workers demanding higher wages as the cost of living increases.

“That is the risk, that we now have the conditions in place for that vicious circle to get going, which wasn’t the case through much of the 2010s,” he said.

If this feedback-loop of wages and prices rises occurred, Gordon said the only circuit breakers would be the Reserve Bank and/or the Government moving to slow down the economy with higher interest rates, or waiting until the next recessionary shock.

“We expect that economic growth will remain sluggish through the early part of 2022, but that conditions will firm through the latter half of the year as the Omicron-related disruptions fade,” the report read.

“Against this backdrop, the labour market is expected to remain very tight, with unemployment on track to fall to just 3 per cent over the coming months,” the report reads.

Helping to support economic conditions, the report notes prices for commodity exports have hit record highs, jumping by 24 per cent over the past year.

Westpac expects further growth in commodity export prices over the first half of 2022, with global dairy prices leading the way.

House prices were forecast to go the other way.

Westpac’s report notes the housing market has already turned down sharply in recent months, with prices dropping 2.6 per cent since November and sales numbers running at levels below that of pre-pandemic times.

“This downturn in the housing market has been compounded by a tightening in loan-to-value limits since November, and changes to the CCCFA (or more accurately the Responsible Lending Code) which came into effect from December,” the report notes.

“Following that tightening in lending conditions, new mortgage lending has fallen sharply, dropping by an estimated 9 per cent in December (after adjusting for normal seasonal variations).”

The bank predicted a further cooling of the housing market over 2022, with prices expected to drop 5 per cent.

“But while that is a stark turnaround, the expected price declines would only reverse a small portion of the gains seen in recent years, meaning that housing affordability is set to remain stretched relative to incomes.”

Westpac predicts the Reserve Bank could increase the official cash rate to 3 per cent, which would further cool the housing market as mortgage interest rates tracked the increase.

However, Gordon didn’t expect this to have any catastrophic impact on house prices, with most banks already having baked the increased OCR into their home loan rates.

He said the likelihood of recent buyers ending up with negative equity was low.