Economic Weekly: Omicron reminds us the pandemic is not over yet

Over the weekend the World Health Organisation named Omicron a COVID-19 variant of concern, while governments around the world scrambled to restrict international travel from high-risk countries. It remains too soon to know the degree of threat the new variant will pose to the management of the pandemic, but it is a timely reminder that the pandemic is far from over and many uncertainties and risks remain.  Global financial markets reacted negatively to the news.  The new variant comes as many European nations are struggling with rising COVID case numbers heading into the Northern Hemisphere winter and are looking to introduce new restrictions, particularly aimed at limiting movement and interactions of the unvaccinated. 

Meanwhile, the speed with which travel restrictions and border closures were put in place over the weekend is also a timely reminder that international travel in 2022 won’t be in anyway ‘normal’.  With NZ set to allow home isolation for fully-vaccinated citizens and residents from early next year, many are likely to be eying up an international trip.  However, the lessons from Omicron (and the bursting of the TransTasman Bubble) are that international borders and quarantine requirements can be altered with little to no notice.  People looking to travel overseas need to be prepared with a contingency plan and ready to fly home at a moment’s notice (or risk becoming stuck for a prolonged and unknown period as is the case for those who remained in Australia).  This also highlights the challenges and risks of opening up for international tourism over 2022.

The development of the Omicron variant also reinforces the RBNZ’s decision to lift the OCR in “considered steps”, opting for a 25 basis point lift in the OCR last week, rather than a 50 basis point lift.  The RBNZ’s message to financial markets was that, yes – interest rates do need to go up, but how high remains uncertain so don’t get too far ahead of yourselves.  Indeed, a new vaccine resistant COVID-19 variant really would materially hamper the recovery for the NZ and global economy next year. On domestic considerations, the RBNZ is wary of how much mortgage rates have already lifted, and – as strong as the economy has been over 2021 – is mindful of the number of headwinds facing households over 2022.  Higher interest rates and the rising cost of living outstripping wage increases could have quite the cooling effect on spending.  This could be potentially compounded by wealthier NZ households redirecting money away from domestic tourism and retail spending to international travel instead.  Furthermore, credit conditions are tightening beyond just the lift in mortgage rates – tighter Loan to Value Ratio restrictions are just kicking in, along with some banks beginning to impose debt-to-income lending limits. 

On some positive news (for Aucklanders at least) Freedom Day is close approaching for the vaccinated, and no doubt many NZers will be tuned in at 4pm to see what regions will be Red and what regions will be Orange under the new traffic light system.  Like it or loathe it, the traffic light system is a positive step forward for the NZ economy, and with highly-transmissible COVID variants it looks like systems which restrict the movements of the unvaccinated are about to become the international norm.   jane.turner@asb.co.nz 

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