There is still considerable uncertainty about the trajectory of the Covid-19 pandemic and its effects on the global economy. Inflation has recently increased around the world and many central banks around the world will raise their key rates to stabilize inflation in 2022, says Dr. Murat Ungor.
GDP fluctuations to date during the Covid-19 pandemic
The emergence of Covid-19 and the measures to contain it since the start of the pandemic have led to a historic economic contraction in New Zealand.
Gross domestic product (GDP) fell 10.3% in the June quarter of 2020, the largest quarterly decline since the current series began in the late 1980s.
New Zealand avoided a recession thanks to promising growth in the first quarter of 2021. GDP grew by 1.5% in the March quarter of 2021 after contracting by 0.4% in December 2020.
GDP grew by 2.4% in the second quarter of 2021 but fell by 3.7% in the September quarter of 2021, the second largest drop after the June 2020 contraction.
The negative growth in the September 2021 quarter was mainly driven by national and regional shutdowns, which affected all major sectors – primary industries, producing goods and services -.
The New Zealand economy is expected to return to positive growth in the December 2021 quarter results, which will be released in March 2022.
The government is no longer pursuing an elimination strategy now that a large majority of the population is vaccinated, and My Vaccine Pass is available to all New Zealanders who have received a double vaccination.
The new traffic light system which was rolled out in December 2021 has allowed many stores and businesses to open and offer services properly. These are good measures to revive economic activity.
ANZ, for example, forecasts quarterly growth of 2.5% for the December quarter of 2021. We will have to wait for the publication of the GDP results to find out.
Are lockdown-induced GDP contractions over?
The answer is a cautious yes. On October 4 last year, the Prime Minister said ‘it has become clear that long periods of heavy restrictions have not brought us to zero cases’. And Covid-19 is still with us.
There are still a few cases of the Delta variant of Covid-19 in the community, while in controlled isolation increasing numbers of people arriving from abroad are testing positive for the more infectious Omicron variant, which can also affect doubly vaccinated.
We cannot ignore the threat of Omicron spreading in New Zealand, as we have seen it spread rapidly to other parts of the world. We must be ready and well prepared for a possible outbreak of Omicron.
Added to this threat are economic concerns, both national and international, which call for caution on the road to economic recovery. A specific economic challenge for 2022 is accelerating inflation.
Is Inflation Going Up, Going Up and Going Away?
Inflation is on the rise almost everywhere and is becoming a global problem.
U.S. consumers are facing the fastest inflation in nearly four decades: The headline consumer price index (CPI) rose 7% for the 12 months ending December 2021, the biggest increase on 12 months since period ending June 1982.
Britain’s CPI rose 5.1% in the 12 months to November, its highest level in more than a decade.
Accelerating global inflation has many causes, including pent-up demand, continued supply chain disruptions and rising energy prices, which soared 18.9% in the OECD area in the over the past year, the highest rate since September 2008.
Disorder in the global supply chain is a major concern. Exporters have been grappling with spikes in freight prices and shipping backlogs in 2021. Delivery delays and supply chain difficulties have caused shortages at supermarkets in various countries. Electricity shortages in China have affected production in recent months as factories have been idle to avoid exceeding power consumption limits.
Supply chain issues are still with us. The city of Xi’an, a major economic and logistics hub in northwest China, was placed under strict control on Dec. 23, 2021. The city is home to many high-tech companies. Two of the world’s largest memory chip makers – Samsung Electronics and Micron Technologies – have research and manufacturing facilities. Both companies have raised concerns about manufacturing delays.
New Zealand consumers are also facing increasing price increases. Annual inflation was 4.9% in the September 2021 quarter, compared to 1.4% in the September 2020 quarter: (i) housing and household utilities increased by 6%, (ii) transport increased increased by 13%, (iii) food increased by 3.1%.
These price increases do not affect all households in the same way because the consumption baskets of high-income and low-income households differ.
Inflation is particularly damaging for low-income households with rising food and energy prices as well as housing rental prices. International data on inflation and income inequality suggest that they are positively linked.
2022 will be a difficult year for economically vulnerable families and low-income households.
How are central banks reacting?
Future inflation expectations continue to rise. The Treasury’s semi-annual economic and fiscal update, released on December 15, 2021, forecasts CPI inflation to peak at 5.6% in the March quarter of 2022.
Some central banks have already started raising interest rates to reduce inflation rates and others will make hikes in 2022.
The Bank of England raised its main interest rate to 0.25% in December 2021 and in the same month the central bank of Norway raised the key rate from 0.25% to 0.5%.
The Federal Reserve, the central bank of the United States, is also expected to raise interest rates in 2022.
The Reserve Bank of New Zealand (RBNZ) implements monetary policy by setting the official exchange rate (OCR). On November 24, 2021, the RBNZ raised the OCR by 25 basis points (a quarter of a percentage point) to 0.75%.
How much should the pool increase OCR, and for how long? I expect it to rise steadily until it hits 2% by August 2022.
OCR influences mortgage rates, so they would also increase. Mortgage rates have already increased by 1.5-2% and are expected to increase further by 1-1.5% in the coming year.
If inflation persists and interest rates continue to rise, rising debt servicing costs for existing homeowners will be another issue.
2022 will be a tough year for central bankers as they will constantly think about when and how to raise interest rates to control soaring prices.
*Dr. Ungor declares that he has no conflict of interest.