01. Economic Update - Brad Olsen, Principal Economist Infometrics

Economic Update.

- Brad Olsen, Principal Economist Infometrics

New Zealand’s economic outlook remains upbeat, although the uncertainty over the extended effects of the Delta outbreak of COVID-19 are weighing on future growth.

Uncertainty remains, with business activity in Auckland and part of the Waikato still constrained, and concern about summer economic activity, falling consumer sentiment, and border reopening all increasing caution about what’s around the corner.

However, economic fundamentals are showing remarkable resilience, which provides New Zealand with a solid foundation from which to bounce back again from current setbacks. Spending activity outside of Auckland has shown strength, although the hospitality sector remains hard-hit across New Zealand.

The labour market remains incredibly stretched, with the unemployment rate dropping to a record-low 3.4% in the September 2021 quarter – in line with the December 2007 record pre-Global Financial Crisis. Jobseeker Support numbers continue to fall, job ads remain at high levels, and businesses report that they are experiencing both the most difficult period to find labour, and the highest levels of job churn, since the 1970s.

The intense labour market pressure is down to both strong economic demand activity and widespread skills shortages. Businesses are having to offer higher pay and other non-remuneration benefits to not only attract new staff and retain their current workers. Limited MIQ spaces and the general removal of usual skilled migration is a key challenge for businesses.

Supply chain disruptions continue to worsen, with freight costs up ten times above normal levels. With various pressures building in the economy, inflation has accelerated to 4.9%pa – the fastest in decades (excluding the GST hike in 2011). Considerable heat in the cost of living has seen the Reserve Bank increase interest rates, with expectations of continued hikes to reduce the level of stimulus in the economy.

House price growth continues unabated, with constrained supply of new houses keeping the pressure on. Building levels are at record levels, with over 47,000 dwelling consents in the last year, and the wider construction sector is stretched as housebuilding rises further, commercial investment charges ahead, and infrastructure needs grow.

The uneven hit from COVID-19 remains a key concern as New Zealand’s economy evolves, with some areas, industries, and households hard hit. Other parts of the economy are experiencing intense pressure. In general, an upbeat and confident view of the economy remains. But caution over the uncertain path next persists.