Omicron, house price falls: Economists ponder 2022

Tuesday, 14 December 2021

Omicron and a weaker housing market are two of the clouds on the horizon for the New Zealand economy in 2022, Westpac’s economists say.

They have released their latest Regional Round-up report, which notes that economic activity in locked-down parts of New Zealand is likely to rebound now that they have moved to the new traffic light system for managing Covid-19.

But key questions remain about the new Covid-19 variant and how the country will respond over the next 12 months.

The report said the delta outbreak in August put Auckland’s economy “on ice” and affected Northland and Waikato to a lesser degree. Otago suffered because of the borders being closed, both internationally and to Aucklanders.

* Rural regions will continue to lead the economic recovery, Westpac says

* Westpac: Expect house price falls next year

But industry economist Paul Clark said the newly free regions should catch up quickly thanks to the traffic light system and Auckland's borders being relaxed.

“Otago should soon follow once internal borders are lifted, and foreign visitors are allowed back in the country.”

Auckland’s economic activity should bounce back, Westpac says.

The outlook for 2022 was generally good, Westpac’s economists said.

Agriculture, horticulture, construction and manufacturing were delivering strong economic activity.

“Regions that have a large rural backbone are well set and we expect them to continue to lead their metropolitan counterparts over the coming year. Indeed, most growers and farmers can expect to benefit from healthy price levels and a positive tailwind provided by a weaker NZ dollar,” Clark said.

“Construction is also likely to be a big positive, with elevated levels of consent issuance expected to drive activity in most regions.”

But he said the positive outlook was not without risk.

“The most obvious of these relates to the new omicron variant, and the potential for restrictions on economic activity and border closures once it reaches our shores. Other factors, such as persistent inflation, ongoing supply chain disruptions and labour shortages also pose downside risk,” he said.

Auckland’s economic activity should grow strongly over the year, the bank said.

“Indeed, the shift to the traffic light system has already resulted in a big pickup in retail activity. More is likely to come when the borders are open. Ditto for hospitality, which is likely to roar back into life after being shut down for an extended period.”

The economists expect house price increases to slow in the first half of the year and for prices to fall in the second half, due to rising interest rates.

That could cause a “deteriorating wealth effect” in some areas and reduce spending momentum.

“The potential for sharper price corrections is higher in relatively small markets like Southland and the West Coast. Conversely, smaller falls are possible in places like Canterbury and Otago, where gains to date have not been as strong,” Clark said.

Meanwhile, the BusinessNZ planning forecast for December noted that the recovery from the latest lockdown was not likely to be as strong as initially predicted.

“Rather than a short, sharp lockdown, the ongoing effects will be felt well into next year as many businesses try and recover over close to two years’ on-again off-again lockdown losses. And there is also the significant issue of increasing government debt which will need to be addressed at some point down the track,” the report said.

Chief executive Kirk Hope said there were other hurdles ahead, too.

'International borders still closed in early 2022, and isolation requirements on international visitors are likely to further affect tourism, hospitality and other service sectors. Meanwhile, inflationary pressures, supply chain disruptions and labour shortages all point to an economy likely to be held up by stop-go signs,' he said.