by Nick Clark, Group Manager National Policy
Omicron impacts
With Omicron in the community economic consultancy Infometrics this week released a timely report Exploring Omicron’s Potential Economic Impact on New Zealand.
The report provides a brief overview of selected topics identified internationally as key economic challenges during the outbreak of the Omicron variant of COVID-19.
It finds that New Zealand’s economic recovery will be disrupted due to limitations on hospitality and events at Red and supply chain shocks, high levels of absenteeism, and lower economic participation as people go out less and interact less with business.
Fewer people will be available to work, with a rough estimate of 12% absenteeism based on 25,000 per day peak cases, and 350,000 isolating at that time. Australian examples show considerable challenges for transport, logistics, and supermarket operations. Supply chain challenges will be exacerbated by sustained high levels of spending focused on supermarkets. Medical supplies, pasta, and toilet paper appear vulnerable.
It says the Government’s Leave Support Scheme and Short Term Absence Payment will be important to enable workers to stay home and get paid and help businesses fund this pay.
Economic participation will drop as people go out less after contracting COVID-19 and having to isolate or even just feeling the hassle or the hesitancy of going out. Overseas data shows a 25% drop in restaurant activity from normal levels.
Overseas data also suggests there will be an immediate and high demand for tests for households and businesses.
Inflation surges to three decade high.
Statistics NZ’s Consumers Price Index increased 5.9% for the year the December 2021. It was the biggest annual movement since a 7.6% annual increase in the year to June 1990.
Increases were widespread across CPI groups, with the biggest annual increases for:
- Transport up 15.0%, with private transport supplies and services (mainly fuel prices) up 21.1% and passenger transport services up 17.9%.
- Housing and household utilities up 7.6%, with home ownership up 15.7% and property rates and related services up 7.0%.
- Miscellaneous goods and services up 4.9%
- Recreation and culture up 4.7%, with other recreational equipment and supplies up 13.5% and major recreational and cultural equipment up 10.9%.
- Food prices up 4.1%, with fruit and vegetables up 7.2%.
In contrast to these increases, prices in the communication group were down 2.4% mainly due to an 8.3% decline in telecommunications equipment.
On a quarterly basis, comparing December 2021 with September 2021, the CPI was up 1.4%, with:
- Transport up 3.9%, with private transport supplies and services up 5.4% and purchase of vehicles up 1.9%.
- Communication up 3.6%, with telecommunications equipment up 16.5%.
- Household contents and services up 2.2%, with furniture, fittings, and floor coverings up 7.9%.
- Recreation and culture up 2.1%, influenced by other recreational equipment and supplies (up 2.4%) and audio-visual and computing equipment (up 4.7%).
- Housing and household utilities up 2.0%, influenced by higher prices for home ownership (up 4.6%) and actual rentals for housing (up 1.2%).
- Miscellaneous goods and services rose 1.7%, influenced by other miscellaneous services (up 3.5%) and personal care (up 2.1%).
The 1.4% quarterly increase and 5.9% annual increase were both around recent market expectations but stronger than the Reserve Bank’s forecast made last November. Economists expect inflation to peak at over 6% in the current March quarter. With inflation seemingly less transitory and more widespread a further increase in the OCR on 23 February is all but assured and it won’t be the last.
Government finances
The Government’s Interim Financial Statements for the five months to November 2021 show the impact of the Delta lockdowns and support measures, although slightly better than forecast in last month’s Half Year Economic & Fiscal Update.
Core Crown tax revenue for the period was $41.13 billion, $252 million more than forecast, due to higher revenue from corporate tax and other individuals’ tax and source deductions. Meanwhile, core Crown expenses came in at $52.75 billion, $406 million less than forecast.
The operating balance before gains and losses was a deficit of $8.35 billion, $1.24 billion smaller than forecast.
Net core Crown debt at 30 November 2021 was $116.91 billion (34.5% of GDP), $1.90 billion lower than expected.
Farm sales down, prices up
Data from the Real Estate Institute of NZ has shown a drop in farm sales, but an increase in median sales prices.
For the three months ended December 2021 there were 293 farm sales, down 18.8% on the three months ended November 2021 and down 46.6% on the three months ended December 2020. However, it was a different picture for the full year to December 2021 where there were 1,831 farm sales, up 14.7% on the previous year. Dairy farm sales were up 84%, finishing farms up 10%, and grazing farms up 7%, but dairy support sales were down 23% and arable farms were down 15%.
The median price per hectare for all farms sold in the three months to December 2021 was $37,980, up 0.7% on the three months to November 2021 and up 39.0% on the three months to December 2020. Meanwhile, the REINZ All Farm Price Index, which adjusts for differences in farm size, location, and farming type, was up 2.8% compared to the three months to November 2021 and up 21.8% compared to the three months to December 2020.
Manufacturing and services recovering
Economic activity in the manufacturing and services industries recovered in December 2021, according to BNZ-BusinessNZ’s Performance of Manufacturing Index (PMI) and Performance of Services Index (PSI).
The seasonally-adjusted PMI for December was 53.7, up 2.5 points from November. A PMI reading above 50.0 indicates that it is expanding; below 50.0 that it is declining. All the PMI’s sub-indexes were above 50.0, with Production (56.4) and New Orders (57.5) back above their July 2021 (i.e., pre-Delta) levels. However, the sub-index for Deliveries of Raw Materials (50.0) remains well below its long-term average, reflecting ongoing supply chain challenges.
Meanwhile, the PSI was also up 2.5 points to 49.7. The sub-index of Activity/Sales (50.7) recorded its first positive activity level since July 2021, while New Orders/Business (51.7) recorded consecutive expansion levels. Looking ahead Omicron and the red traffic light setting will impact on gathering limits and could impact on the ability or willingness of people to go out, which will impact on many service industries.
Departures up in November
An increase in departures drove a provisional net migration loss of 4,000 people in the year ended November 2021, according to Statistics NZ’s International Travel and Migration Statistics.
There was a 9,800 net loss of non-New Zealand citizens only partly offset by a net gain of 5,800 New Zealand citizens.
Overall, there were 28,700 border crossings in the month of November 2021, made up of 12,300 arrivals and 16,400 departures. Arrivals and departures were up by 1,300 and 6,600, respectively, compared with October 2021. The increase in departures coincided with Australia’s opening of quarantine-free travel from New Zealand on 1 November 2021.
Net migration loss is more bad news for businesses, including farms, already suffering from acute labour and skill shortages.
Household saving rises
Household saving increased following last year’s nationwide lockdown, according to Statistics NZ’s quarterly National Accounts (Income, Saving, Assets and Liabilities).
New Zealand households saved over $3.8 billion during the September 2021 quarter, driven by a 6.3% drop in household spending compared to the June 2021 quarter. Stats NZ put the fall in household spending down to the impact of higher COVID-19 alert level restrictions in place during the quarter.
Lower spending led to an increase in the ratio of household saving to net disposable income, from 1.0% in the June 2021 quarter to 7.5% in the September 2021 quarter.
Total income received by households fell by 0.3%, driven by a $245 million decrease in income received by self-employed business owners.
NIWA Soil Moisture Data
NIWA’s latest soil moisture maps (as at 9am Thursday 27 January) show soils continuing to be significantly drier than usual across much of the North Island, especially so in coastal Waikato, Waitomo, and North Taranaki. In the South Island, western areas from Golden Bay to Fiordland continue to be very dry relative to their usual conditions, whereas eastern areas from Kaikoura to Dunedin are wetter than usual, with Kaikoura especially so.
Exchange Rates
The NZ Dollar lost ground again this week, down 1.6% against the Trade Weighted Index. It dropped against the currencies of all our major trading partners.
Source: Reserve Bank of NZ
Wholesale Interest Rates
Over the course of the week, the yield for the 90 Day Bank Bill was up 2 points to 1.10% and the 10 year Government Bond yield was up 6 points to 2.66%.
The Reserve Bank will next review monetary policy settings (including the OCR) on 23 February 2022. Another increase is almost certain.
| This Week (27/1/22) | Last Week (20/1/22) | Last Month (24/12/21) | Last Year (27/1/21) | |
| OCR | 0.75% | 0.75% | 0.75% | 0.25% |
| 90 Day Bank Bill | 1.10% | 1.08% | 0.96% | 0.29% |
| 10 Year Government Bond | 2.66% | 2.60% | 2.34% | 1.03% |
Source: Reserve Bank of NZ