Waikato Economic Radar Oct-Dec 2021

We are writing this summary on Valentine’s Day, as the gift that is Omicron really starts to show its bite. It is no longer just a covid story. We have largely dodged the health bullet to date. But the reality of Omicron, and rapidly accelerating exposures, close contacts, and impact on businesses ability to keep their doors open is now palpable.

The primary data contained in this Radar is Q4 2021, with some additions from more recent data or from anecdotal evidence. Whilst the data tells a story, our view is that the numbers are not really yet telling the real story of what is approaching quickly around the corner. Omicron is changing behaviour, and things are evolving rapidly.

Despite early projections of doom and gloom, the New Zealand economy enjoyed a massive tail wind through 2020 and 2021, with metrics far beyond most commentators’ forecasts. Now we are dealing with the reality associated with rising Omicron cases over the coming weeks, the enduring impact of Covid, the inflationary consequences of the massive tailwind provided by the Reserve Bank and Government, and a capacity constrained economy that in the words of the OECD is showing signs of “overheating”. These present challenges in the near-term, medium term and long-term. Containing inflation will not be growth or asset price friendly.

Yesterday’s Stats NZ release suggests that the CPI is still accelerating, with rents rising in line with expectations, but food prices well ahead of what commentators were expecting. The market view seems to be that CPI inflation still has momentum, and that Omicron could easily add to that in the near term, with ANZ commenting today that ‘despite slowing housing and risks to the activity outlook, the inflation impulse provides plenty of reason for the RBNZ to stay the course with OCR hikes’ – bringing further pressures to businesses and households alike. Inflation does have some positives. Witness high commodity prices and a booming dairy pay-out. A few key things we are watching:

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