On a roll: Strength in the domestic construction sector is maintaining momentum in the economy. Photo / Michael Craig
On a roll: Strength in the domestic construction sector is maintaining momentum in the economy. Photo / Michael Craig
The New Zealand economy has remained resilient despite the Delta outbreak and is well placed for a recovery in 2022, Westpac economists say in a new report.
Record prices for agricultural exports coupled with ongoing strength in the domestic construction sector will enable the economy to maintain momentum, Westpac's quarterlyEconomic Overview says.
However, the relatively upbeat outlook comes with a caveat about the ongoing spread of Covid-19 and the likelihood of some sort of health restrictions staying in place for some time.
There is also a warning that inflation also looks set to keep building and interest rates will keep rising.
A cooling in the housing market and the subsequent slowing in the rapid increases in household wealth could also dampen household demand.
Still, Westpac is forecasting solid average annual GDP growth of 4.6 per cent in 2022.
The Delta outbreak was a blow, but in many ways the economy had remained in good health, said Westpac chief economist Michael Gordon.
"In fact, through the September quarter, when alert level restrictions were at their most prohibitive, employment levels rose by 2 per cent and the unemployment rate fell to just 3.4 per cent – equal to the lowest level on record."
Household demand had also stayed firm, with retail spending levels in areas outside of Auckland running around 5 per cent above the levels seen prior to this latest outbreak.
Businesses were better positioned to deal with the shift back into lockdown this time, and have continued to push on with investment spending and hiring.
Looking ahead to 2022 there were positive indications for activity in many key parts of the economy, Gordon said.
"With resilience in underlying demand conditions, we expect that unemployment will remain low over the coming months and that economic activity will rise back to firm levels as health restrictions are eased."
Of note, was the large amount of construction work planned across the country with a record 47,000 new dwellings consented over the past year.
Feedback from businesses in the manufacturing sector also indicated that demand had remained firm, he said.
Prices for our key agricultural exports had hit record highs and overseas demand conditions continue to look favourable.
Fonterra's farmgate milk price is set to reach a record $8.90/kg this season.
The meat sector was also seeing high export prices.
Westpac sees the price strength being sustained in the next few months. While farmers were reporting higher input costs those should be offset on balance by the higher returns.
A record farm gate milk payout will help the economy. Photo / NZME
However, that didn't mean it would all be smooth sailing for the economy.
"With infection numbers continuing to rise, health restrictions are likely to be wound back only gradually and we don't expect economic output will retrace its pre-Delta levels until mid-2022," Gordon said.
Inflation pressures would remain intense for some time, and the Reserve Bank would need to take the cash rate into "tight" territory to rein it in.
"We're forecasting a series of OCR hikes over the coming years, with the cash rate to peak at 3 per cent in 2023."
Debate about whether recent price shocks were "transitory" was beside the point, Gordon said.
"Strong demand presents the greater risk for ongoing inflation," he said.
"We're forecasting the inflation rate to peak at 5.1 per cent in the December quarter, and remain elevated over the coming year."
As the recent pandemic-related price spikes dropped out of the equation, the annual rate would drop back into the Reserve Bank's 1-3 per cent target range in 2023 - although it could remain at the upper end of the range.
Westpac expects the kiwi dollar to rise to 74 cents next year, supported by interest rates and commodity prices.
However, that actually represents a downgrade compared to its forecast in August, when it expected a peak of US77c next year.
That mainly reflected a more resilient US dollar rather than a weaker kiwi dollar, as US inflation expectations became more elevated.
