After the three-and-a-half-month COVID-19 lockdown in Auckland lifted in early December, New Zealand’s economy is set to continue to grow heading into the first quarter of 2022. However, the economy will flatline soon after and face some headwinds. The Reserve Bank of New Zealand (RBNZ) seeks to manage the impacts of higher inflation resulting from global supply chain shortages, increased household spending and the unprecedented level of COVID-19 stimulus measures. The economic impacts of new COVID-19 variants such as Omicron remain a tail risk as some global regions such as Europe continue to battle new waves of cases.
Predicting the future is never easy, especially during a global pandemic. However, New Zealand now has 87.5% of the eligible population fully vaccinated, with 93% of people having had their first doses. The Delta variant has been behind most new cases, mainly in Auckland. As of the 5 December, no Omicron variant cases have yet been detected. New Zealand has had some of the toughest border controls in the world to contain the pandemic.
In the first week of December, New Zealand began to trial a new “traffic light” system that rates regions red, orange or green. Auckland will start at red, with face masks mandatory in public venues.
Official Cash Rate raised to 0.75%
The RBNZ has been leading the global economy in lifting interest rates, with the official rate now raised to 0.75%. This is in response to inflationary pressures caused by supply shortages and increasing demand[1] as well as unsustainable house prices. The latest 25 basis point hike comes on top of a similar hike one month ago, making this 0.25% rise the second in short succession after interest rates had not risen for seven straight years. The last rise was in July 2014 when rates were raised to 3.50%.
Analysts may well ask about the long-term outlook. The RBNZ is expected to raise the official cash rate (OCR) to 2% by the end of 2022 and reach a terminal rate of 2.7%-3.0% by the end of 2023 to deal with rising inflation and a heated housing market. Consumer price index (CPI) inflation now stands at 4.9% in the third quarter of this year. The RBNZ will be mindful of the need to gradually lift rates to rein in inflationary pressures and avoid too much disruption to the housing market.
House prices in NZ have had very strong growth while mortgage rates have also increased quickly, now typically above 4% (though some banks are still offering mortgage rates under 4%). The government is looking to other measures in addition to gradual interest rate rises to cool this market, which has been rising at .[4] One of the new measures is aimed at reducing speculation, limiting property investors from deducting mortgage interest from their taxable income, effective 1 October 2021.[5]
Across the Tasman, the Reserve Bank of Australia is expected to keep the official Australian cash rate low for at least another 12 months until there are stronger signs of wages growth and underlying inflation. There has been a lot of market discussion about whether the recent inflation data is just transitory due to COVID-19-related supply chain impacts rather than reflecting stronger underlying growth. The RBNZ in contrast has decided to act now before inflation becomes set, rather than allowing inflation to continue to overshoot.
While the RBNZ has been one of the first global central banks to begin lifting rates, the sudden change in inflation may mean the RBNZ is already behind the curve considering how quickly the domestic economy has shifted. The[6] The RBNZ’s broader monetary policy also remains stimulatory with its Funding for Lending program for banks continuing until the end of next year. In addition, the RBNZ is still holding the bonds purchased under its Large Scale Asset Purchase program, which ended in July.
Strong signs of growth
While GDP growth contracted significantly in the September quarter (-7.0%) due to the lockdowns, very strong GDP growth of 5.6% is expected for Q4 based on the RBNZ’s November forecasts. The RBNZ is also expecting the strong growth recovery to continue into the first quarter of 2022 before it begins to flatline.
As NZ eases COVID-19 restrictions, forward-looking indicators such as the Performance of Manufacturing Index (PMI) are turning around.[2] With the Manufacturing PMI scoring a weak 39.7 in August during level four restrictions, the index has since reverted to a more positive outlook at 54.7 in October. The October reading of the Services PMI was contractionary, however data is expected to improve with the re-opening of Auckland in early December.
NZ labour market participation has been very strong. Unemployment declined to an all-time low of 3.4%[1], an almost 2% drop since the same time last year. This indicates that NZ has weathered the worst impacts of the pandemic. Significantly, the underutilisation rate is also now below 10% at 9.2%, an improvement of 1.3% since the last quarter, reflecting a broader improvement in employment figures.[2]
Wages increased by 0.8% for the quarter and are up 2.4% over the past year.[3] There is some risk that, when the borders reopen, employees may leave for Australia or elsewhere. This presents a risk for a recovering services sector, both in the form of lost business and staff.
Despite the selloff in bond markets with the rise in interest rates and stronger inflation expectations, both the NZ dollar and the Australian dollar have weakened. This has been attributable to the increase in expectations that the RBNZ will bring forward rate hikes following its release of the latest CPI figures as well as more recent concerns around the Omicron variant.
Major risks to watch for in 2022
COVID-19 is becoming less of a driver of financial markets and more of a tail risk, depending on the assessment of the Omicron variant. The global key risks to watch will be whether supply chain impacts ease and how quickly central banks respond to stronger inflation expectations.
So far, equities have remained reasonably resilient to increased inflation expectations and even more recently to the Omicron variant. Equity prices have however been well underpinned by a strong recovery in corporate earnings and market stimulus. While forward valuations are now looking less expensive due to the catch up in earnings, the withdrawal of central bank market stimulus could lead to higher market volatility in 2022.
A broader risk to the global recovery is also the slowing of growth in China as well as the continued political tensions impacting on global trade. With signs already of a slowing in its economic growth, China has recently been facing a disruptive energy shortage that could worsen as the Northern Hemisphere approaches winter. In addition, China continues to adopt a COVID-zero policy, meaning it will remain sensitive to lockdowns.
Term life policies
Term life insurance policies provide protection for a specific period of time, normally subject to a maximum age. They offer a lump sum payout to your estate or surviving policy owners should you pass away in that time, but do not have a cash value. Retaining one of these into your 50s may be worth considering, especially if your life circumstances change; for example, a second marriage brings further children or dependants from a previous marriage.
Insurance premiums and corresponding cover can be structured in a way that helps you plan and manage your budget over the lifetime of the policy. To help you choose the right option for you, it’s important to consider your short and long-term cover needs, how long you need cover for, your current budget and expected future income and expenses.
It is common for Term life insurance policies to have a yearly stepped premium. This means premiums for a set amount of cover increase each year as you get older. Some policies allow what are called “level premium” options, which means premiums are fixed for a defined period of time, with some reverting to ‘stepped premium’ at the end of this period. It’s also possible to have a combination of both for certain policies. What is most suitable for you will depend on your circumstances. In the short-term, stepped premiums can be the most affordable option, however for longer term protection needs, utilising level premiums for all or some of the cover can create more certainty around premium costs. Generally, the younger you are when premiums are set to “level”, the lower the level premium will be.
We know that your financial situation may change, including your protection needs and income. The good news is that your cover can be flexible and change with you.
1. Ministry of Health, COVID-19 vaccine update, Media release, 30 November 2021.
2. Reserve Bank of New Zealand, MPC continues to reduce monetary stimulus, 24 November 2021.
3. The inflation rate is the annual change for the year ending September 2021.
4. Stats NZ, Consumers price index: September 2021 quarter, 18 October 2021
5. Australian Financial Review, Why you should be wary of a Kiwi house price calamity, 29 November 2021
6. ABC News, New Zealand seeks to cool scorching housing market with new law reducing deductions, 28 September 2021
7. Reserve Bank of New Zealand, Monetary Policy Statement, November 2021
8. Reserve Bank of New Zealand, Monetary Policy Statement, November 2021
9. Business NZ, Stepping Up – PMI, 12 November 2021
10. Stats NZ, Unemployment rate, 3 November 2021
11. Stats NZ, Labour Market Statistics: September 2021 quarter, 3 November 2021
12. Stats NZ, Labour Market Statistics: September 2021 quarter, 3 November 2021
The content of this article is for information purposes only. The information in this article is general in nature and does not constitute financial, or other professional, advice. Before taking any action, you should always seek financial advice or other professional advice relevant to your personal circumstances, needs and objectives. While care has been taken to supply information in this article that is accurate, no entity or person gives any warranty of reliability or accuracy, or accepts any responsibility arising in any way including from any error or omission.
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