The New Zealand economy will lose a year of growth – and recovery from the latest Covid lockdown will be more gradual, according to ASB chief economist Nick Tuffley.
Speaking at the ASB Backing Business webinar on the economic state of the nation, Tuffley said life can be turned upside down very quickly but "we are now learning to live with Covid in the community".
"As we enter the traffic light system – there's generally not much difference between the levels of restrictions – there will be an easing of pain and pressures especially in Auckland, and less disruption for businesses as they will be able to remain open.
"Business sentiment collectively is more upbeat than last year, but there is going to be a huge range of individual experiences from people who have done extraordinarily well to those who are really struggling."
The economy had been rebounding nicely this year, with annual gross domestic growth running at 5.1 per cent. That changed when the country went into lockdown in mid-August; Auckland, the economic powerhouse, stayed there longer.
This lockdown has dragged on and there will be "a bit more scarring", said Tuffley. There will be businesses unable to reopen or which will be smaller if they do.
"The pressure is more extreme for the hospitality and small city centre businesses in Auckland, and coming out of lockdown will be more challenging for them. They will be gearing up for Christmas – and one of the issues will be how trading goes over the summer, particularly in the New Year.
"If there is an exodus from the city, then these businesses will be relying on making money before Christmas to get them through the holiday period."
Data from October and November shows the hospitality sector in Auckland has been trading at just 4 per cent on average, compared to the same time in 2019.
Tuffley said this time around, fewer businesses took up (ASB's) financial relief packages as many had built up cash reserves to help provide a financial buffer. It looks like many businesses have got through so far but there is still a long way to go.
Business activity took a hit from mid-August, though a degree of normality returned to the regions outside Auckland and Waikato when they returned to Alert Level 2. Tuffley said: "We will see some decent growth coming through in the early part of next year, getting us back to near where we were before, then growth will remain moderate through the rest of the year."
ASB is forecasting gross domestic product (GDP) will fall 7 per cent in the September quarter – the number to be released by Stats NZ on December 16.
The bank believes GDP will rebound 5 per cent in the December quarter, another 2 per cent in the March quarter next year, followed by activity gains of 1.5 per cent in the June and September quarters.
The aftermath of the first lockdown in March last year revealed a 11 per cent fall in GDP for the June quarter but, by the end of September, activity surged 13.9 per cent.
The recovery continued through the first half of this year (March quarter up 1.4 per cent and June 2.8 per cent), with annual GDP growth running at 5.1 per cent in the June quarter; the economy had grown to $340 billion. But the hard work was undone as the Delta variant spread.
"We will make up the (latest September quarter) decline sometime around the middle of the year," said Tuffley.
"Moving from elimination to suppression strategy, under the new Covid traffic light system, means there will be some restrictions – but they won't have the same impact, with businesses able to remain open; the transition will be more orderly."
The first lockdown last year was sharp but shorter, he said: "You had a real extreme of sentiment – the fear of losing of your job moved to the fear of missing out, and people who would usually spend on overseas holidays went on a spending splurge for goods for the house.
"The housing market took off in a phenomenal way and the construction boom just got bigger. Exports continued, even though there were shipping disruptions."
Tuffley said the latest rebound won't be as sharp and quick. "Credit will be tighter, interest rates are rising, fewer people are coming into the country and population growth is low, and we are building more homes and supply is catching up.
"We won't see the same mad crazy housing boom. There will be further recovery in consumer spending, construction will keep growing, and the services sector will start returning to a normal level. Tourism and international education will also return next year."
The labour market is a lot tighter – with unemployment reaching 3.4 per cent in the September quarter, the lowest since December 2007: "Businesses know how challenging it is to recruit staff and they have learned from last year that they need to retain their people. If they are recruiting, then they are faced with rising wage growth – along with cost pressures such as importing and freight."
There is also the effect of rising inflation. ASB is forecasting inflation of 5.9 per cent for the December quarter – up from 4.9 per cent in the September quarter, the highest since the second quarter of 2011. ASB believes inflation will settle just above 3 per cent during next year, falling to 2-2.5 per cent later.
"The rise in wages is struggling to keep up with inflation," said Tuffley. "I do expect businesses to pass on a lot of their increased costs through pricing. The ability to do that reflects the strength of consumer spending but real wage growth will take a hit in the short term."
There were positives for households. Job security was good, they had built up their savings and they paid off credit card debt.
"They say it's always darkest before the dawn, and that's where the country has been. We are transitioning to an environment where we are learning to live with Covid," said Tuffley.
"The price for keeping Kiwis safe will be a bit less in that we won't be lurching into very restrictive lockdowns and all the challenges and costs they impose. With very high vaccination rates, you can get your life largely back to normal."
For more insights, resources and tools to help your business prepare for the future, see the ASB Business Hub asb.co.nz/businesshub