ECONOMIC OVERVIEW We have lift-off - November 2021 - Westpac
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ECONOMIC OVERVIEW We have lift-off. November 2021
Michael Gordon Satish Ranchhod Nathan Penny Paul Clark Gregorius Steven
Acting Chief Economist Senior Economist Senior Agri Economist Industry Economist Economist
+64 9 336 5670 +64 9 336 5668 +64 9 348 9114 +64 9 336 5656 +64 9 367 3978
New Zealand economy 01
Global economy 04
Inflation and the RBNZ 06
Agricultural outlook 08
Exchange rates 09
Special topic: Positioning industry for a post-Covid future 10
Economic and financial forecasts 11
The economy in six charts 12
Note from Michael
The August Economic Overview was released just hours before the news of a Covid-19 case in the community and the swift move into
a nationwide lockdown. The following three months have been a rollercoaster ride, with the Delta variant proving harder to control,
and the Government having to rapidly adjust its strategy to juggle health, wellbeing and economic concerns.
The Delta outbreak was a blow to an economy that had been charging upwards in recent months. Yet in many ways, the economy has
remained in good health. Businesses were better positioned to deal with the shift back into lockdown this time, and have continued
to push on with investment spending and hiring. At the same time, prices for our key commodity exports have continued to rise, with
the farmgate milk price set to reach a record $8.90/kg this season.
Activity was running well above pre-pandemic levels before the latest outbreak, and we expect that it will return there as restrictions
are eased. However, the consequence is that the conditions for a sustained rise in inflation have built up in a way that they haven’t
for many years. And with that, the Reserve Bank of New Zealand has been among the first central banks to achieve interest rate lift-
off since the pandemic began. We think that many more interest rate hikes will be needed in the coming years to bring demand and
inflation back down to earth.
In our previous issue we looked at the policy responses to Covid that might arise in New Zealand, based on developments overseas.
Much of what we talked about has already come to pass, hurried along by the current outbreak. In this issue we turn to how the
private sector might respond, as Covid disruptions prompt firms to look at improving their resilience.
Michael Gordon
Acting Chief Economist
Text finalised 12 November 2021 | ISSN 1176-1598 (Print) | ISSN 2253-2897 (Online) | For address changes contact: WNZResearch@westpac.co.nzNEW ZEALAND ECONOMY
Break my stride.
The Delta outbreak has disrupted economic activity and is set to remain a drag on growth for
some time yet. Even so, the New Zealand economy as a whole remains in good health, and we
expect a return to firm levels of activity in 2022. But behind the scenes, policy settings are
shifting, and interest rates are on the rise. That signals big changes in the economic landscape
over the years ahead.
As 2021 draws to a close, New Zealand is continuing to with a record 47,000 new dwellings consented over the past
grapple with the impacts of August’s outbreak of the Delta year. Similarly, feedback from businesses in the manufacturing
variant. Economic output is estimated to have fallen by 6% sector indicates that demand has remained firm. And as
in the September quarter. And although Alert Levels have discussed in the Agricultural outlook chapter, prices for our key
generally been dialled down over the past few months, health agricultural exports have hit record highs and overseas demand
restrictions have continued to weigh on activity in some parts conditions continue to look favourable.
of the economy.
The impacts of the outbreak have been most pronounced in
Auckland, with retail spending in our most populous region While we expect a return to firm levels of
running around 30% below pre-Delta levels. However, Delta’s activity in 2022, that doesn’t mean it will be
reach has been felt across the country, with many businesses in
customer-facing industries like hospitality still struggling with smooth sailing for the economy.
significant reductions in demand, even in regions that are at
Alert Level 2.
With resilience in underlying demand conditions, we expect
that unemployment will remain low over the coming months
Figure 1: Weekly retail spending and that economic activity will rise back to firm levels as health
Index Periods of heightened Alert Levels highlighted Index restrictions are eased. However, that doesn’t mean it will
1250 1250 be smooth sailing for the economy. With infection numbers
Rest continuing to rise, health restrictions are likely to be wound
of NZ
1000 1000
back only gradually and we don’t expect economic output will
retrace its pre-Delta levels until mid-2022.
750 Akd 750 In addition, prior to the latest outbreak the economy was
grappling with a cocktail of supply disruptions, material
500 500
shortages and rising costs. Those conditions are likely to
remain a feature of the economic landscape well into the new
Source: MBIE, Westpac estimates
year. They will also limit the scope for a period of ‘catch-up’
250 250 activity as we saw following the initial Covid outbreak last year.
Feb-20 Aug-20 Feb-21 Aug-21
Figure 2: Quarterly GDP forecasts
While the Delta outbreak has been a significant drag on some
parts of the economy, overall economic conditions have actually $bn $bn
75 Westpac
75
remained fairly resilient. In fact, through the September quarter,
Thousands
forecasts
when Alert Level restrictions were at their most prohibitive,
employment levels rose by 2% and the unemployment rate fell 70 70
to just 3.4% – equal to the lowest level on record. We’ve also
seen firmness in household demand, with retail spending levels
65 65
in areas outside of Auckland running around 5% above the
levels we saw prior to this latest outbreak.
60 60
Looking to the coming year, there are positive indications for
activity in many key parts of the economy. Of note, there is a 55
Source: Stats NZ, Westpac
55
large amount of construction work planned across the country 2018 2019 2020 2021 2022 2023 2024
Westpac Economic Overview 01The changing mix of activity in the wake of Covid has seen away from its previous ‘elimination’ strategy to managing Covid
New Zealand’s trade balance deteriorate, with the current in the community. Under the Government’s new approach, the
account deficit set to reach 6.6% of annual GDP next year. That country will move to a ‘traffic light’ system once vaccination
would be the largest deficit since 2009. rates hit 90% of the eligible population in every region. This
will involve public health measures, like social distancing
Much of the widening in the current account deficit stems from requirements, being dialled up or down as necessary to
the closure of our borders and related loss of international manage the pressure on the healthcare system, but without
tourist dollars. Prior to the outbreak, New Zealand was a resorting to lockdowns in the future. A key feature of this new
net exporter of tourism and other services. However, with framework is that there will now be more restrictions on the
international tourists now shut out of the country, our previous unvaccinated, while households and businesses that make use
services trade surpluses have given way to sizeable deficits of vaccination certificates will be subject to fewer restrictions.
over the past year.
Figure 4: Vaccination rates
At the same time, Covid has resulted in significant changes % of population % of population
in what New Zealand households are purchasing. With Eligible population Total population
international travel off the cards and health restrictions limiting 100
89% 100
spending on domestic recreational activities, households 79%
80 75% 80
have instead been spending more on goods like furnishings 67%
and appliances, the bulk of which are imported. That's been 60 60
amplified by the significant amounts of monetary and fiscal
stimulus introduced in response to the pandemic, and the 40 40
related strong levels of domestic demand.
20 20
While the deterioration in our international trade position has 0 0
been stark, we expect that this will be temporary and that the First dose Second dose First dose Second dose
current account balance will return to healthier levels over the Source: NZ Ministry of Health as at 11 November 2021
coming years. As vaccination rates continue to rise, Covid-
related restrictions here and abroad will be wound back over The shift to the traffic light system signals an important change
time and many of the shifts in demand we have seen over the in the economic landscape for many businesses, especially
past year will start to reverse. On this front, we expect that those in close-contact industries such as hospitality. As
New Zealand will begin a staggered reopening of the border we’ve seen over the past year, health restrictions and social
in early 2022 based on different countries’ Covid risk level. At distancing requirements do dampen demand to some degree,
the same time, we’re likely to see households spending less and there’s a chance that restrictions could be in place for an
on imported goods and more on services like dining out as the extended period. However, the resulting drag on demand from
health situation allows the hospitality sector to gradually open such restrictions is much less severe than when the economy
up again. has been pushed back into lockdown. Furthermore, with a
growing proportion of the country fully vaccinated, fewer
Figure 3: Current account balance and components households will be subject to strict activity restrictions if case
numbers flare up again.
% of GDP % of GDP
10 10
Current account balance Westpac
Balance of goods forecasts It was always going to be the case that once the vaccination
Balance of services programme was sufficiently advanced, New Zealand would
5 Investment income balance 5
need to determine how to live with Covid over the longer term.
Consequently, although the current outbreak has forced the
0 0 country to confront these issues sooner than otherwise, the
change in approach from the Government has not meaningfully
altered our outlook for the economy in 2022 and beyond.
-5 -5
However, as a result of the Delta outbreak, the Government
Source: Stats NZ, Westpac
-10 -10 has again had to spend several billion dollars on measures to
1990 1995 2000 2005 2010 2015 2020 2025 support households and businesses in recent months. That
includes the reintroduction of the wage subsidy scheme, as well
as new initiatives such as the Resurgence Support Payment.
This additional pressure on the Government’s finances will limit
The shifting policy landscape. the amount of new Government spending over 2022 fiscal year.
While we expect a return to firm economic conditions over the Nonetheless, the surprisingly strong 2020/21 fiscal accounts
coming year, behind the scenes, some of the key policy settings combined with the mostly unchanged fiscal outlook for 2023
that have shaped the post-Covid economic environment are and beyond means we still expect the Government will continue
now changing. with its longer-term focus on enhancing social and economic
wellbeing. Indeed, the Government has already continued
down this path in early November, announcing spending of
First of these is the Government’s approach to the Covid
$272m to boost the Working for Families package.
outbreak itself. It has not been possible to halt the spread of
the Delta outbreak. As a result, the Government has moved
02 Westpac Economic OverviewA cooling in the housing market and the subsequent slowing
Increases in borrowing costs will squeeze in the rapid increases in household wealth will also dampen
discretionary incomes over the coming years, household demand. As mortgage rates rise, we expect a
substantial slowing in house price growth over the coming
dampening both household demand and months, turning to modest price declines by the second half of
economic growth more generally. 2022. That slowdown will likely be compounded by a tightening
in lending regulations, with the RBNZ currently consulting on
debt-to-income limits on mortgage lending.
The other key area where significant changes are in train
is monetary policy. Interest rate reductions since the start While we expect an easing in house prices over the coming
of the pandemic have played a pivotal role in supporting years, recent increases in prices have been dramatic. The
New Zealand’s recovery, with much of the resulting boost to expected price declines would only reverse a small portion
demand coming through the household sector. In fact, since of the gains seen in recent years, meaning that housing
March 2020 reductions in borrowing costs have put around affordability is set to remain stretched relative to incomes in
$380m back into households’ wallets each quarter. At the same many parts of the country.
time, household balance sheets have been boosted by a 40%
rise in house prices over the past 18 months.
Figure 6: House price forecasts
Index = 1000 in 2010 %
Combined with other support measures and firmness 3000 Westpac forecasts 40
in the labour market, those developments have super-
Annual growth (right axis)
charged household spending over the past year. However, 2500
30
household debt levels have also risen rapidly over this Level (left axis)
2000
period: New Zealand households are now carrying debt that’s 20
equivalent to 169% of their disposable incomes, with most 1500
of the rise related to mortgage debt on owner occupied or 10
investment properties. 1000
0
500
As discussed in the Inflation and the RBNZ section, the Reserve
Bank has now begun to lift the Official Cash Rate. That follows 0
Source: CoreLogic, Westpac
-10
the faster than expected recovery in economic activity over the 2010 2012 2014 2016 2018 2020 2022 2024
past year and the related build-up of strong inflation pressures.
We expect that the RBNZ will continue to raise the OCR over the
coming years, taking it into ‘tight’ territory by the end of 2022.
The resulting increases in borrowing costs will reverberate Checking the foundations.
through all parts of the economy, with the current strong
New Zealand’s residential construction sector has been a major
economic conditions set to give way to a period of modest
driver of GDP and employment growth, and we expect that
economic growth through 2023 and 2024.
home building levels will remain very strong over the next few
years. However, under the surface, some of the key factors that
Mortgage fixing will blunt the impact of rate rises for a time. have supported the lift in home building have been shifting.
Even so, we estimate that spending on debt servicing is likely
to rise from just under 8% of households’ disposable incomes
First is population growth. For much of the past decade, very
currently to around 11% in 2023. That would more than offset
high levels of net migration meant that home building failed to
the increase in households’ spending power seen over the past
keep pace with increases in the population. However, since the
year, and the resulting squeeze on discretionary incomes will
borders have closed, population growth has plummeted and
dampen both household demand and economic growth more
the shortages of homes that have developed in many regions
generally over the coming years.
over the past decade are now being rapidly eroded (especially
in Auckland). Even when the borders do reopen, we expect
Figure 5: Debt servicing costs (% of households’ disposable income) that population growth will remain lower than it was over the
% % past decade. The Government is currently reviewing migration
14 14 policy, and this is likely to lead to tighter entry conditions than
Source: RBNZ, Westpac estimates Westpac
12
forecasts
12 in the past.
10 10
The financial incentives for developers are also likely to be
8 8 eroded over the coming years. Material and labour costs have
been rising rapidly. And borrowing costs are now also on the
6 6
rise. Combined with a cooling in house price growth, it’s likely
Interest and scheduled
4 principal payments 4 that the number of new projects coming to market will ease
back from the current record levels as we approach the middle
2 Interest payments 2
part of the decade.
0 0
2015 2017 2019 2021 2023 2025
Westpac Economic Overview 03GLOBAL ECONOMY
Inflation check, lift-off in T minus…
Inflation has proven to be more persistent rather than transitory for some of our major trading
partners. As a result, markets have priced in more policy rate increases than before as they
believe that central banks will need to act. While inflation in countries like Australia and
the US has been driven by strong demand, China’s inflation has mainly been driven by rising
input costs.
Inflation has continued to rise globally due to both supply and Figure 8: World trade volumes
demand dynamics. Bottlenecks in supply chains have persisted Index Index
for longer than expected, as illustrated by the continued 140 140
elevated cost of moving goods around the world. In addition,
130 130
prices of commodities used as raw inputs have held at high
levels. Demand has also led inflation higher for developed 120 120
economies as both employment and growth have continued
to recover. 110 110
100 100
Figure 7: Core inflation
% % 90 90
5 5
Source: CPB World Trade Monitor
US Australia China 80 80
4 4 2011 2013 2015 2017 2019 2021
3 3
2 2
The increasing demand side pressure on economies has seen
markets pricing in more aggressive actions for central banks
1 1 since the last Economic Overview. Most of the moves in interest
0 0
rates have been driven by markets pricing in higher policy rates,
as central banks will likely need to raise policy rates sooner
-1 -1 to keep inflation in check. Markets are also now increasingly
-2
Source: Bloomberg
-2
confident that demand-driven inflation is likely to prove more
2006 2009 2012 2015 2018 2021 persistent (rather than transitory), and that central banks will
react by raising policy rates.
The re-opening of economies globally due to higher
vaccination rates has boosted demand. Governments have
shifted their focus from case numbers to hospitalisations.
However, governments are still trying to balance the easing Markets are pricing in higher policy rates,
of restrictions with the possible pressure on the healthcare as they anticipate central banks will need to
system, resulting in a gradual approach to easing restrictions. hike sooner to keep inflation in check.
As economies continue to re-open there has been some
reallocation of spending away from goods and back towards Central banks, as a result, have signalled that they are willing
services. However, given the generally gradual pace of easing to tighten monetary policy sooner than what they had stated
Covid restrictions, the shift in spending has been much slower earlier in the year. However, when the tightening will occur, and
than we expected, as seen in the slow decline in world trade by how much, still varies from country to country.
volumes from record highs.
We expect that the US Federal Reserve will be the next major
central bank to tighten monetary policy. They have already
reduced the rate of bond purchases in their latest review, and
The reallocation of spending away from we expect purchases to halt by the middle of 2022. We then
goods to services has been slower expect the Fed to begin lifting its policy rate in December 2022.
than anticipated.
04 Westpac Economic OverviewFigure 9: 10-year government bond yields slack as unemployment is still higher than pre-Covid and
% %
participation is yet to recover. While the economy is expected
2.50 2.50 to maintain above-trend growth 5% in 2021, 4.6% in 2022 and
US
2.00 Germany 2.00 2.1% in 2023, inflation is still expected to sit below target.
UK Our forecast of CPI ex-energy peaks at 1.9% for 2021 before
1.50 Australia 1.50 reducing to 1.7% in 2022 and 1.5% in 2023.
1.00 1.00
While China has also faced inflation, we view this as more due
0.50 0.50
to higher input costs rather than pressure from demand. This
0.00 0.00 contrasts to the demand-driven inflation that our other major
trading partners such as Australia and United States are facing.
-0.50 -0.50
Source: Bloomberg
-1.00 -1.00 Indeed, rising prices for oil and coal have undoubtedly been
May 2020 Nov 2020 May 2021 Nov 2021
a headwind for China’s energy hungry economy. The impact
of high and rising coal prices was felt particularly acutely as
Despite these moves, we think that the Fed is still likely to it contributes to a large portion of electricity generation in
remain very accommodative in its settings. The peak in its China. Sharply rising input costs with limited ability to pass
policy rates is likely to be lower than what it is has traditionally it onto their consumers has meant a shortage in the supply
been in the past. As a result, we expect US rates of growth and of electricity. This led to power rationing which has limited
inflation to remain higher than their long-term trends. Indeed, manufacturing activity.
the Fed’s forecasts for its preferred measure of inflation range
from 3.4% to 4.2% for 2022-2024, well above its target of 2%.
Figure 10: Chinese producer prices
% %
Developments in the labour market will also be key for US 20 20
inflation outcomes. Factors holding back labour supply such
as lack of childcare support, schools being closed, and Covid 15 15
cases are all diminishing. Bringing back additional labour
10 10
supply will be needed to meet this hot demand, and in doing so,
wage growth should ease. 5 5
The Reserve Bank of Australia has also taken its first steps to 0 0
unwind stimulus. They have already ended their yield curve
-5 -5
control programme, noting that as other interest rates had
Source: Bloomberg
risen the effectiveness of the programme has diminished. In -10 -10
addition, the guidance on the first increase in the cash rate 2000 2004 2008 2012 2016 2020
acknowledged that it could be sooner than 2024. We remain
more optimistic about the outlook for next year, and we expect
In addition to those supply side headwinds, economic growth
the RBA to start lifting its policy rate in February 2023.
has also been negatively impacted by fresh Covid outbreaks
and subsequent lockdowns in some regions. However, the non-
Our difference in view notably stems from differences in the manufacturing PMI showed a bounce in September and held
outlook for the labour market. Activity is likely to bounce back firm in October, indicating that the lockdown disruptions to the
due to pent-up demand in New South Wales and Victoria. In economy may be limited.
addition, the move away from trying to eliminate Covid to
mitigating the risk of it decreases the likelihood of restrictive
Turbulence in the Chinese property sector may prove a
lockdowns. As a result, the RBA’s inflation and employment
longer-term issue for the Chinese economy and policymakers.
objectives are likely to be met by the end of 2022.
This has mainly come in the wake of regulatory changes
which aim to reduce leverage and reduce wastage, while the
financial struggles of Evergrande, the world’s largest property
developer, have added to the sector’s headwinds. Given a
China’s inflation has been due to higher input large portion of Chinese wealth is tied up in real estate, this
costs rather than pressure from demand. could reduce future consumption. To offset the drag from the
property sector, business investment will need to make up a
bigger portion of total investment.
The European Central Bank is taking a more tentative approach
to removing stimulus. Within the next few months, they intend The higher global inflation we’re seeing is likely to be a tailwind
to slow the pace of its bond purchases. Their latest monetary for New Zealand. This would provide a boost to exporter
policy statement reiterated that the first increase in policy incomes, as discussed in the Agricultural outlook section. In
rates would not occur until around 2024, whereas market addition, we could see ongoing higher tradables inflation, in
implies pricing a small chance of a rate hike in late 2022. contrast to what we saw in the 2010s when tradables prices
were a persistent drag on headline inflation.
The reluctance for the ECB to become more hawkish like the
RBA and Fed likely stems from the fact that they view high
inflation as temporary. The labour market still has considerable
Westpac Economic Overview 05INFLATION AND THE RBNZ
The only way is up (for now).
Inflation in New Zealand has been running hot, boosted by a potent cocktail of supply-side
cost pressures and strong demand. We expect that those pressures will remain intense for
some time, and that the Reserve Bank will need to take the cash rate into ‘tight’ territory to
rein inflation in. We’re forecasting a series of OCR hikes over the coming years, with the cash
rate to peak at 3% in 2023.
As we’ve seen elsewhere in the world, the inflation rate in ‘core’ inflation you might use, stripping out the influence of
New Zealand has blown out beyond expectations in recent more volatile items, a clear uptrend has been emerging – and
months. Consumer prices rose 4.9% in the year to September, arguably was even before the pandemic.
a pace that we’ve rarely seen, and then only briefly, in the era of
inflation targeting. New Zealand’s Covid response limited the potential scarring
from lockdowns, allowing demand to recover quickly, and
The current spike in inflation is the result of a range of domestic fiscal and monetary stimulus added further fuel to the fire. By
and global supply-side pressures, as well as strong demand, the middle of this year, it was apparent that the greater risk
coming together at the same time. The intersection of those for inflation was that demand was outstripping the economy’s
factors has resulted in widespread – and often large – increases capacity to meet it.
in the prices for many consumer goods and services. That has
been further compounded by base effects, with some prices In that respect, the debate over whether recent price shocks
having rebounded from Covid-depressed levels a year earlier. will prove ‘transitory’ is beside the point. When demand is
It’s not a stretch to say that inflation won’t remain this high running hot, a temporary price shock can provide the catalyst
forever, but that still leaves open a wide range of possibilities. for an ongoing series of wage and price increases, even once
the initial shock recedes. Once that point is reached, monetary
One of the challenges in the outlook for inflation is policy will need to step in as a circuit-breaker.
disentangling the extent to which these forces will be short-
lived or more persistent. For example, Covid restrictions
have skewed global demand away from services and towards
physical goods, which has strained the capacity of both the Debate about whether recent price shocks
manufacturing and transport industries. We expect these
pressures to ease as economies reopen and spending patterns
are ‘transitory’ is beside the point – strong
normalise. Indeed, there are signs that they’ve now passed demand presents the greater risk for
their worst, although we’re cautious about predicting how ongoing inflation.
quickly they will recede.
Figure 11: Indicators of persistent inflation We’re forecasting the inflation rate to peak at 5.1% in the
December quarter, and remain elevated over the coming year.
Annual % Annual %
6
CPI non-tradables
6 As the recent price spikes drop out of the equation, we expect
the annual rate to drop back into the Reserve Bank’s 1-3%
5 RBNZ sectoral factor model 5 target range – albeit in the upper half of the range – in 2023
CPI labour-intensive services and beyond.
4 4
3 3 This would mark quite a change from the previous decade,
which was characterised by stubbornly low inflation both in
2 2 New Zealand and around the world. During that time, fiscal
austerity created an additional headwind for monetary policy,
1 1
and inflation expectations were at risk of becoming unanchored
0
Source: Stats NZ, RBNZ, Westpac
0 to the downside of central banks’ targets. Those two factors
2007 2009 2011 2013 2015 2017 2019 2021 have certainly turned around in the post-Covid era. In addition,
the drive towards hyper-optimisation of global supply chains,
which had been a disinflationary force over the last decade,
The greater concern is the extent to which home-grown
may be rethought in the wake of Covid disruptions.
inflation pressures are emerging. Whichever measure of
06 Westpac Economic OverviewFigure 12: Inflation forecasts Against this, the strongest argument for a more cautious
Annual % Annual % approach is the uncertain impact of the latest Covid
6 6
Westpac restrictions. While the RBNZ probably used last year’s
5
forecasts
5
successful lockdown as the template for this time around,
that hasn’t proven to be the case. The lengthier period of
4 4 restrictions, and their more gradual withdrawal, could have
more lasting effects on firms’ balance sheets and consumer
3 3 behaviour than we’ve seen up until now.
RBNZ target band
2 2
1 1 Baked in.
Source: Stats NZ, Westpac
0 0 Our OCR forecast track implies that the floating interest rates
2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 faced by borrowers have quite some way to rise from here.
Fixed-term rates, however, are another matter. While most
forecasters – and the RBNZ’s August projections – suggest a
peak in the OCR of around 2%, wholesale interest rates are
Up, then down. already consistent with a peak closer to our view of 3%. That
While we expect inflation to settle within the target range over might be a genuinely-held belief by traders, or it could be an
the medium term, that is of course contingent on the path of overreaction to recent data in a volatile market. Either way,
monetary policy. In our August Economic Overview, we took the those wholesale rates are in turn reflected in today’s retail
view that a gradual glide path up towards a ‘neutral’ level of the interest rates.
OCR, generally estimated to be around 2%, would be enough
to keep inflation in check. But the accumulated evidence on the Fixed-term mortgage rates have risen sharply across the board
economy since then suggests that more will be needed. in recent months – even the popular one- to two-year fixed
rates, the lowest points on the curve, have risen more than a
We expect the Reserve Bank to lift the OCR to a peak of 3% by the percentage point from their lows in July. Our OCR track does
third quarter of 2023, which would take monetary policy settings suggest that the upswing in fixed-term rates has further to go,
beyond ‘neutral’ and into ‘tight’ territory, at least for some time. but is already well-advanced.
As demand is reined in and inflation pressures cool, we’ve then
pencilled in a series of OCR cuts back to 2% in 2025. Admittedly, Figure 13: OCR and swap rate forecasts
predicting the next phase of interest rates is hard enough, let
% %
alone the next two phases, but we’re really trying to convey the 6 6
OCR Westpac
general direction of policy rather than the exact timing. forecasts
5 Two-year swap rate 5
Five-year swap rate
With so much monetary tightening to do over the next couple 4 4
of years, the question of tactics naturally crops up. Our view
is that moving in increments of 25 basis points would be 3 3
sufficient. But we’d emphasise that there is a meaningful risk
that the Reserve Bank could choose to go in larger 50 basis 2 2
point steps at any given time.
1 1
Source: RBNZ, Westpac
0 0
2010 2012 2014 2016 2018 2020 2022 2024
There is a meaningful risk that the Reserve
Bank could move in larger 50bp steps.
Financial market forecasts (end of quarter)
CPI 90-day 2 year 5 year
The RBNZ itself said that it actively considered a 50 basis inflation
OCR
bill swap swap
point hike in August – at a time when the economic evidence
Dec-21 5.1 0.75 0.95 2.30 2.60
for doing so was less compelling than it is now. A subsequent
speech set out the framework under which the RBNZ might take Mar-22 5.1 1.00 1.40 2.55 2.80
bolder action – when ‘the kōtuku would take flight’, to use their Jun-22 4.4 1.50 1.90 2.75 2.95
analogy. It’s possible to argue that all of the given conditions Sep-22 3.0 2.00 2.20 2.90 3.05
are being ticked off: Dec-22 2.7 2.25 2.45 2.95 3.10
Mar-23 2.4 2.50 2.70 3.00 3.15
– The starting point for the economy is wildly different to what
Jun-23 2.0 2.75 2.95 3.00 3.15
the RBNZ expected.
Sep-23 2.1 3.00 3.10 2.95 3.15
– The risks are becoming skewed, towards persistently higher
Dec-23 2.2 3.00 3.10 2.90 3.10
rather than lower inflation.
Mar-24 2.3 3.00 3.10 2.80 3.00
– There is a meaningful risk of not meeting their inflation and
employment mandates over the medium term – relative to
their current projection for a gradual pace of tightening.
Westpac Economic Overview 07AGRICULTURAL OUTLOOK
To the moon and some way back.
Agricultural commodity prices are shooting for the moon. Prices have hit unprecedented levels
across most sectors at different parts of the year. And we expect overall there is more to come
in 2022. However, input prices are mirroring this strength. Indeed, keeping costs in check where
possible will prove key to making this season a record one in not just price, but profit terms too.
New Zealand’s commodity prices have skyrocketed over 2021. further reduced demand for wood. With still very high shipping
In world price terms, the ANZ Commodity Price Index has set a costs also weighing on log export markets, log prices have
string of records, with October setting the latest of five record fallen to around long-run average levels.
highs this year.
Nonetheless, we expect the overall commodity price strength
The latest record comes as global dairy prices get a second to continue in the short term. We expect the weakness in global
wind. Notably, global dairy production has slowed this year, dairy production to persist into the new year and for this to
and poor weather has put New Zealand production on the back lead global dairy prices higher over coming months. Similarly,
foot over winter and spring. As a result, global prices have ongoing strength in global feed grain prices is likely to keep
again lifted, leading us to revise our 2021/22 farmgate milk price meat export prices elevated. Allowing for the normal seasonal
forecast up by 40 cents to $8.90/kg. price patterns, we expect farmgate beef and lamb prices
to remain at or near record highs through summer and into
Not to be left behind, meat prices have also taken off. Farmgate the autumn.
beef, lamb and mutton prices have all knocked off record highs
over recent months. Increasing freedoms in our key markets Farm and orchard input prices are, however, mirroring
and the renewed ability to eat out has driven the surge in meat skyrocketing farmgate prices. Indeed, the price rises are
prices, although some supply constraints such as very high broad-based, with input prices such as fertiliser, feed, wages
feed grain prices have also been a factor. and fuel all shooting for the stars. Moreover, we expect that like
farmgate prices, input prices are likely to remain very high well
In other sectors, demand and supply have been more mixed. into 2022.
The 2021 kiwifruit crop jumped a massive 16% compared to the
2020 crop, and this has dampened export prices from record On balance, surging farm and orchard farmgate prices should
highs to mere healthy levels. Meanwhile, after hitting giddy more than offset rising costs. That said, farmers and growers
heights in June, demand has cooled for forestry exports. The alike will need to keep their eye on the cost ball to ensure that
Chinese economy has come off the boil, plus the struggles they keep as much as possible of these record returns.
of Evergrande, the world’s largest property developer, have
Commodity price monitor
Next 6
Sector Trend Current level 1
months
Soft global dairy production, including a weak start to the New Zealand season, has given dairy prices a second
Dairy Above average
wind. We’ve lifted our 21/22 forecast to $8.90/kg.
Rebounding demand has led farmgate beef prices to record highs. Allowing for the normal seasonal patterns, we
Beef Above average
expect prices to remain very healthy.
Farmgate lamb prices have set fresh record highs. Allowing for the normal seasonal downturn, we expect prices
Lamb/Mutton High
to remain historically high.
Forestry prices are well past their peak and are being weighed down further by softening Chinese demand and
Forestry Average
the ongoing blowout in shipping costs.
Kiwifruit prices have eased on extra supply but remain very high. With less supply, apple prices have remained
Horticulture Above average
at very healthy levels.
Fine wool prices have continued to lift on the back of improved global apparel demand. The earlier improvement
Wool Low
in coarse wool prices has stalled.
1 NZ dollar prices adjusted for inflation, deviation from 10 year average.
08 Westpac Economic OverviewEXCHANGE RATES
Stuck on the launchpad.
The New Zealand dollar has continued to be volatile, initially falling after the return of Covid
restrictions. However, the underlying economy remains strong as we move towards a gradual
easing in restrictions. We expect the currency to appreciate against the US dollar due to it
being undervalued for some time based on fundamentals.
The New Zealand dollar has seen some volatility since already risen sharply as the RBA has brought its ‘yield curve
the August Economic Overview. It initially fell after the control’ programme to an end.
announcement of a return to Alert Level 4 for the country
after a community case of Delta was detected. That also We expect both currencies to continue benefitting from high
saw the Reserve Bank delay the policy rate hike that had commodity prices, although Australia’s largely industrial
been fully priced in by the market for the August Monetary commodity exports leave it more exposed to the risk of a
Policy Statement. slowdown in China compared to New Zealand’s agricultural
exports. In addition, we expect both economies to perform well
Once the initial shock had passed, high-frequency data pointed in the near term, as discussed in the New Zealand economy and
to the economy bouncing back quickly again as restrictions Global economy sections. On balance, we expect the NZD/AUD
were eased. It has also become more apparent that the exchange rate to hold broadly steady over the coming year.
economy was running hot before we went into lockdown,
as demonstrated by the CPI and labour market data for the Figure 14: NZ dollar exchange rate vs major currencies
September quarter.
Index = 100 in Jan 2020 Index = 100 in Jan 2020
115 115
We expect the NZD to gain ground against the US dollar over
110 110
the next year, reaching an average of 74 cents by the end of
2022. Our assessment is that the NZD is undervalued, and 105 105
indeed has been for some time. Indeed, relatively high interest
100 100
rates and record-high commodity prices both argue for a
stronger NZD. 95 95
90 US dollar UK pound 90
Australian dollar Japanese yen
85 85
We expect the NZ dollar to rise to 74 cents 80
Source: RBNZ
Chinese yuan
80
next year, supported by interest rates and Jan 2020 Jul 2020 Jan 2021 Jul 2021
commodity prices.
Exchange rate forecasts (end of quarter)
However, that represents a downgrade compared to our view NZD/ NZD/ NZD/ NZD/
in August, when we expected a peak of US 77 cents next year. NZD/JPY TWI
USD AUD EUR GBP
That mainly reflects a more resilient US dollar rather than a Dec-21 0.71 0.95 0.60 0.51 79.5 74.6
weaker NZD. Expectations for US monetary policy have shifted
Mar-22 0.72 0.95 0.60 0.52 80.6 75.2
as activity has picked up and inflation has proven to be more
than just transitory. The Federal Reserve has begun to tighten Jun-22 0.73 0.95 0.61 0.52 82.5 75.9
policy by reducing its purchases of bonds, and we expect it to Sep-22 0.74 0.95 0.63 0.52 83.6 76.6
halt purchases by mid-2022, before it starts to raise the policy Dec-22 0.74 0.95 0.63 0.52 84.4 76.4
rate from December 2022. Mar-23 0.74 0.94 0.63 0.53 84.4 76.3
Jun-23 0.74 0.93 0.64 0.53 85.1 76.0
Against the Australian dollar, the NZD remains high relative to
its historic average. As in New Zealand, interest rates have also Sep-23 0.74 0.93 0.64 0.53 84.5 75.8
moved in the AUD’s favour against the US dollar recently. We Dec-23 0.73 0.94 0.63 0.53 84.7 75.3
don’t expect the Reserve Bank of Australia to start lifting its Mar-24 0.72 0.93 0.63 0.52 83.8 74.6
cash rate until early 2023, but longer-term interest rates have
Westpac Economic Overview 09SPECIAL TOPIC
Positioning industry for a post-Covid future.
The saying goes that necessity is the mother of invention. And that certainly has been the case
with Covid, as firms have scrambled to mitigate the more disruptive aspects of the virus. In
this chapter, we consider some of the changes firms have made to get themselves through the
pandemic and assess whether they are likely to remain in place once a sense of normalcy returns.
Covid reveals kryptonite. with many of these changes underpinned by the adoption of
increasingly sophisticated robots. With the differential with
Covid has laid bare some deep-seated structural vulnerabilities labour costs narrowing to the advantage of robots, and with
in many industries, resulting in big changes in how many processes like 3-D printing on the rise, these innovations are
businesses operate internationally. Some of these changes encouraging some firms to relocate production facilities from
were already in train prior to the outbreak, and as such were low wage economies back home.
evolutionary rather than transformative. The pandemic,
however, has accelerated matters. Many of the changes Aligned to these changes is a move towards more flexible work
that have occurred are now irreversible and are set to shape arrangements, which have become the norm in many countries,
industry fortunes for years to come. and that’s likely to remain the case for the foreseeable future.
According to a UK poll, half of British workers are still working
Key here has been the accelerated pace of technology adoption from home at least some of the time (up from 37% prior to the
with firms scrambling to mitigate the worst impacts of Covid. In pandemic). That’s despite lockdown restrictions having been
a global McKinsey survey undertaken in 2020, about two-thirds lifted in July this year.
of surveyed firms indicated that they had brought forward their
deployment of digital technologies by up to four years because Flexible working arrangements are also likely to remain a key
of the pandemic. feature of the New Zealand labour market, despite elevated
vaccination rates and a resulting push by firms looking to get
And it seems that New Zealand firms have also been quick on people back in the office. That, together with the emergence of
the uptake. A 2020 survey undertaken by Microsoft indicated non-traditional leasing models, such as the co-sharing of office
that a similar proportion of firms in this country were actively space, is affecting the demand for commercial space.
speeding up the adoption of digital services because of Covid,
with a third viewing innovation as being critical for building Firms are also looking to improve the resilience of their supply
resilience and recovery in the post virus era. chains, with digital supply networks now replacing many
traditional linear supply chains. That’s allowing firms to tap into
multiple suppliers, rather than just relying on a single supplier.
From evolution to transformation. At the same time, they are also using automation and sensor
technologies to gain an end-to-end view of supply chains,
Digital technologies are being used to change how firms interact allowing them to anticipate issues before they occur.
with customers. Unable to interact with firms in a physical
sense because of lockdown restrictions, customers have This focus on supply chain resilience has prompted a shift away
shifted en masse to online digital channels to purchase goods from globalisation, with many businesses opting for onshoring
and services. Firms have responded in kind, upgrading their and nearshoring of their supply networks. According to Thomas
e-commerce offerings to deliver seamless customer shopping Insights, about 69% of US manufacturers were actively looking
experiences, while using social media and artificial intelligence at bringing production back to North America at the height
driven “bots” to interact with customers in real time. of the pandemic. Recent research by McKinsey suggests that
as much as 25% of world exports could be affected by the
To that end, Covid has been a game changer. Indeed, according relocation of productive activities by 2025.
to NZ Post, online retail revenues rose by a whopping 25% in
2021. While that sort of growth is unlikely to be repeated once A shift of this scale could have macroeconomic implications.
in-store shopping returns, there is little doubt that online Over the last decade or so, the ability to draw on global
digital channels are here to stay. capacity has weakened the link between demand and domestic
prices and wages in advanced economies. But as supply chains
Other big changes are happening at an operational level. shift from global to more regional settings, a reversal of this
Existing business models are being upended, factory layouts trend could mean more sensitivity in inflation, and a need for
revamped and work organisation methods transformed, more active monetary policy.
10 Westpac Economic OverviewECONOMIC AND FINANCIAL FORECASTS
New Zealand forecasts
GDP components Quarterly % change Annual average % change
Sep-21 Dec-21 Mar-22 Jun-22 2020 2021 2022 2023
GDP (production) -6.0 2.1 2.9 1.6 -2.1 3.8 4.6 4.3
Private consumption -4.9 4.2 3.1 0.3 -1.3 7.0 4.4 2.0
Government consumption 1.0 0.7 0.4 0.2 6.3 7.6 2.2 2.1
Residential investment -15.0 15.0 4.0 2.5 -4.1 10.1 9.4 1.5
Business Investment -0.5 -1.1 5.2 2.6 -8.4 7.5 7.0 6.0
Exports -4.9 -1.9 2.1 3.3 -12.6 -4.1 7.5 10.9
Imports 5.9 2.7 2.4 0.3 -16.0 15.5 8.3 3.8
Economic indicators Quarterly % change Annual % change
Sep-21 Dec-21 Mar-22 Jun-22 2020 2021 2022 2023
Consumer price index 2.2 0.6 0.8 0.7 1.4 5.1 2.7 2.2
Employment change 2.0 0.0 0.2 0.1 0.6 3.5 0.5 1.2
Unemployment rate 3.4 3.8 3.7 3.6 4.8 3.8 3.5 3.6
Labour cost index (all sectors) 0.8 0.8 0.4 0.6 1.6 2.7 2.3 2.8
Current account balance (% of GDP) -4.5 -5.5 -5.7 -6.6 -0.8 -5.5 -6.3 -4.6
Terms of trade 2.0 0.5 -1.2 -1.7 -1.6 5.9 -4.4 2.4
House price index 6.0 3.6 1.0 0.0 17.0 24.0 -1.5 -7.5
Financial forecasts End of quarter End of year
Sep-21 Dec-21 Mar-22 Jun-22 2020 2021 2022 2023
90 day bank bill 0.36 0.95 1.40 1.90 0.27 0.95 2.45 3.10
5 year swap 1.60 2.60 2.80 2.95 0.31 2.60 3.10 3.10
TWI 74.4 74.6 75.2 75.85 72.92 74.6 76.4 75.3
NZD/USD 0.70 0.71 0.72 0.73 0.69 0.71 0.74 0.73
NZD/AUD 0.95 0.95 0.95 0.95 0.94 0.95 0.95 0.94
NZD/EUR 0.59 0.60 0.60 0.61 0.58 0.60 0.63 0.63
NZD/GBP 0.51 0.51 0.52 0.52 0.52 0.51 0.52 0.53
Net core Crown debt (% of GDP) 33.1 37.6 41.0 44.7 32.4 37.6 45.7 46.4
International economic forecasts
Real GDP (calendar years) Annual average % change
2017 2018 2019 2020 2021f 2022f
Australia 2.4 2.8 1.9 -2.4 3.0 5.0
China 6.9 6.7 5.8 2.3 8.5 5.7
United States 2.3 3.0 2.2 -3.5 5.6 4.0
Japan 1.7 0.6 0.3 -4.8 2.3 2.7
East Asia ex China 4.7 4.4 3.7 -2.4 3.8 4.9
India 6.8 6.5 4.0 -8.0 9.0 8.0
Euro Zone 2.6 1.9 1.3 -6.6 4.9 4.4
United Kingdom 1.7 1.3 1.4 -9.9 6.7 5.5
NZ trading partners 4.1 4.1 3.4 -1.8 5.5 4.9
World 3.8 3.6 2.8 -3.3 5.4 4.6
Westpac Economic Overview 11THE ECONOMY IN SIX CHARTS
New Zealand GDP growth New Zealand employment and unemployment
% % Annual % change %
15 Westpac
15 10 8
Quarterly % change forecasts Employment growth (left axis) Westpac
8 forecasts
Unemployment rate (right axis) 7
10 Annual average % change 10
6
6
5 5 4
5
0 0 2
4
0
-5 -5
-2 3
Source: Stats NZ, Westpac Source: Stats NZ, Westpac
-10 -10 -4 2
2005 2010 2015 2020 2025 2005 2010 2015 2020 2025
90 day bank bills, 2 year swap and 5 year swap rates Exchange rates
% % NZD exchange rate Index
10 10 1.00 85
Westpac
90 day bank bill rate forecasts
0.90 80
8 2 year swap rate 8
75
5 year swap rate 0.80
6 6 70
0.70
65
4 4 Westpac
0.60 forecasts
NZD/USD (left axis) 60
2 2 NZD/AUD (left axis)
0.50 55
Source: RBNZ, Bloomberg, Westpac Source: RBNZ, Westpac TWI (right axis)
0 0 0.40 50
2005 2010 2015 2020 2025 2005 2010 2015 2020 2025
Official Cash Rate New Zealand house prices
% % % %
4 Westpac 4 35 Westpac
35
forecast Source: CoreLogic, Westpac
forecasts
30 30
25 Quarterly % change 25
3 3
20 Annual % change 20
15 15
2 2
10 10
5 5
1 1 0 0
-5 -5
Source: RBNZ, Westpac
0 0 -10 -10
2010 2012 2014 2016 2018 2020 2022 2024 2005 2010 2015 2020 2025
12 Westpac Economic OverviewContact the Westpac economics team
Michael Gordon, Acting Chief Economist Paul Clark, Industry Economist
+64 9 336 5670 +64 9 336 5656
Satish Ranchhod, Senior Economist Gregorius Steven, Economist
+64 9 336 5668 +64 9 367 3978
Nathan Penny, Senior Agri Economist Any questions email:
+64 9 348 9114 economics@westpac.co.nz
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