Economic Weekly: Red-dy or not, here it comes

Yesterday we got the heads-up that the Prime Minister would be giving a media conference, which usually means two things: one, there is an unwanted COVID development; two, it’s time to buy 6 months’ worth of toilet paper.  With the Omicron variant of COVID likely out in the community, NZ moved to Red from midnight last night.

Economically, the impacts of this looming outbreak will have very different drivers to what we have been used to.  In the past, NZ has heavily curtailed what sort of activities – commerce and leisure – we have been able to do.  As a result, NZ hugely limited the health impacts of COVID but at some cost to the economy in terms of government-set constraints on businesses.  Omicron is different.  It is far more infectious but looks less deadly.  It is still early days, but government restrictions may not be as onerous. There will a huge number of infections, widespread disruptions and pressures on our health system, and these are what will dominate the economy over coming months.

This time around, Government-set restraints – and their impact – will be very light.  The Red setting allows many activities to carry on for the vaccinated, with the main impacts being on large events/gatherings and hospitality capacity.  Businesses and organisations will be required to manage their workplace so as to minimise exposure risks.  Widespread lockdowns such as Auckland experienced last year look like a thing of the past.

Instead, the main economic impacts are going to come from worker absenteeism and people’s behavioural shifts.  Infected people and their close contacts will be required to isolate, which in some circumstances will mean people isolating for up to a month.  That can result in a lot of staffing disruption.  Our CBA colleagues estimate that in Australia roughly 1 million people (out of 26mn) could be in isolation at present. Labour hours worked over January could be down 3-4% over January (after making an allowance for people who can continue working from home).  People’s behaviour may also differ from what we have been used to.  In the past, the Government essentially laid out what was deemed too risky to do.  Now, people will be making their own risk assessments about what they feel comfortable doing during a large outbreak, and spending patterns may differ.  CBA’s guesstimates from card spending show Australian consumer spending to be roughly 3% down over the holiday period compared to where it would have been, with services spending taking the hit.  NZ’s Level 4 lockdown last year saw card spending drop 20% over August, as a comparison.  

Preliminary findings from Australia also suggest that the economic impact of Omicron may not be as deep as the Delta outbreak (though far more people are going to get sick, unfortunately).  For businesses, it will be important to work through how to minimise the impact of staffing disruptions and how to adapt to/anticipate customer behaviours.

Life will go on.  For the economy NZ Q4 CPI inflation figures on Thursday are a key focus.  Despite (or because of) the pandemic, inflation pressures are soaring.  We expect annual inflation for the December 2021 quarter to hit 6.1% and then to nudge higher in early 2022.  Omicron or not, the RBNZ will continue lifting the OCR this year.  Our forecast is for the OCR to peak at 2% by the end of the year, but the risks are more up than down.