The 'days of reckoning' are fast approaching for New Zealand, according to BNZ economists.
In the latest BNZ Markets Outlook, BNZ head of research Stephen Toplis says the single biggest uncertainty facing the economy over the next twelve months is how business and consumer sentiment responds to endemic Covid.
Toplis believes There are "many ways this can go". At the extremes we could:
- collectively accept the risks of operating in such an environment, relish our freedoms and push ahead with economic expansion; or
- fear could rise aggressively, domestic spending on services could collapse, labour supply could drop and the economy could retrench.
"In reality, there will be a mix of both. And we really have little idea as to what the end game will look like. All we know for sure is that we are in a transition phase and transitions are disruptive," Toplis says.
He believes there is still "a significant chunk of the population" that is still not prepared for operating in a world with Covid.
In his opinion, the major changes that need to be considered by business are:
- The demand for labour will increase, particularly in public-facing businesses as cover will be required for those who can’t come to work because of the direct, or indirect, impacts of COVID.
- The supply of labour will be reduced by those who are simply too fearful of coming to work.
- New Zealand will no longer feel safer than the rest of the world so domestic labour will again be attracted offshore.
- On balance, then, the costs of labour will rise.
- There will be a sustained shift towards online purchasing.
- Hospitality sales are unlikely to return to pre-COVID levels in the foreseeable future.
- The international tourism sector will re-emerge but at a relatively glacial pace.
Toplis says from "a macro economy perspective" this all means that:
"Capacity constraints will remain elevated.
"Labour costs will continue to rise.
"There will be heightened demand for capital/labour substitution.
"Potential growth will be lowered.
"So inflationary pressure will occur at lower levels of activity than previously assumed.
"Meaning that upward pressure on interest rates will remain for some time," he says.
Toplis says everything is broadly on track for the economy to move to the new traffic light system sometime in December "and the PM has 'promised' Aucklanders they will be able to travel for Christmas".
"It is at this point in time that the rest of New Zealand, nationwide, will experience the spread of Covid and the transition will rapidly gain momentum.
"For most of the world endemic Covid is now situation normal. New Zealand is yet to experience this phenomenon.
"We will soon be thrust headlong into a very different world."