‘Tougher path’ to recovery

The New Zealand Institute of Economic Research (NZIER) is warning of a “tougher path” to economic recovery following the emergence of the new Covid variant omicron.

Christina Leung, principal economist, says she still expects the economy to improve through next year but expects it will now be more muted. 

She notes omicron shows how quickly conditions can change and its emergence comes as New Zealand is expected to face an inevitable community spread of Covid-19 with restrictions being relaxed and the country moving into a new traffic light system from December 3.

“Recent developments point to a tougher path for the New Zealand economic recovery ahead,” says Leung, pictured. 

“Nonetheless, we expect the resilience of the New Zealand economy will underpin a recovery in activity over the coming year, albeit with a more cautious tone.”

She adds that inflation pressures have intensified in recent months, largely reflecting acute capacity pressures in our economy. 

Port congestion and shipping delays have led to supply chain disruptions, while border restrictions are contributing to labour shortages.

“Costs have accelerated for many businesses, but they have generally been able to pass some of these cost increases to customers by raising prices. 

“The lift in inflation expectations more recently highlights the risk that high inflation will persist over the coming years.”

Leung believes the Reserve Bank will seek to balance the need to keep inflation in check with the uncertain environment presented by new variants of Covid-19 that will emerge. 

The NZIER predicts the official cash rate (OCR) will be increased by the Reserve Bank in February, with two more rises later in 2022.