Economic outlook

Shamubeel Eaquab

Economist, author and commentator

The outlook for the New Zealand economy and dealmaking in 2022 is positive, but with more risks than in 2021. A move from eliminating to suppressing Covid will mean infections, restrictions, fear and economic activity are likely to come in waves. This means more volatility and uncertainty against a backdrop of reducing policy stimulus.

The New Zealand economy was resilient in 2020 and 2021 despite the trials and tribulations of the COVID-19 pandemic. Elimination strategy meant short sharp lockdowns, with normal domestic economic conditions except for closed borders. Cumulatively, New Zealand had less restrictions than other OECD countries.

Massive policy stimulus, both from the central bank and government, boosted the economy too. The central bank lowered the cost of borrowing. The biggest boost came from a surge in mortgage lending from easier credit setting for banks, but this did not lead to more lending to businesses. Government support was instrumental in keeping workers connected to firms during lockdowns, which reduced job losses and interruption in the recovery.

The New Zealand economy performed the best of all OECD countries except Ireland, which was boosted by technology companies domiciled there. Employment is at record highs and unemployment at historic lows. Inflation is increasing too, although so far mostly due to global factors.

New Zealand will move to a suppression strategy in 2022. This means sustained moderate levels of restrictions domestically, while border restrictions will be eliminated gradually through 2022. Experience from countries like Singapore suggest these restrictions will dampen economic activity a touch.

More importantly, infections and hospitalisations are likely to rise. In winter, there could be a double peak of influenza and Covid, which could overwhelm our health system – which is under-resourced compared to other OECD countries – and lead to new restrictions as we have seen in the Northern Hemisphere winter.

New variants could similarly lead to yo-yo tightening and loosening of restrictions, or people choosing to be less active. The pandemic is not over yet and will continue to affect health and economic policies around the world.

New Zealand will move to a suppression strategy in 2022.

An open border from later in 2022 will allow investors to do on-the-ground due diligence. There is pent up demand from those who have not been confident to do deals online or via local agents.

Unless the health or economic outlook changes materially, both the central bank and government will withdraw support from the economy in 2022. This follows a similar pattern globally: low interest rates and quantitative easing will be gradually unwound over coming years. This period of transition, from loose to tightening will lead to more volatility in access to capital, increase the cost of capital, and potentially reduce price multiples – which are currently at historic highs.

But we should not frame this as a negative outlook. The experience of the last two years is that central banks and governments will intervene at pace and scale when there is clear and present danger. We have also seen extraordinary innovation, flexibility and resilience in the economy, both here and around the world.

These paint an optimistic picture of the state of the economy, even if there are sustained risks from the pandemic, and growing risks from unwinding of policy stimulus. For dealmaking this means that demand for capital will remain high, but supply of capital and multiples less easy. Good deal making will need good advice and good networks, as always.

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