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Will 2022 be the year of the 'next normal'?

When New Zealanders return from their summer holidays, the world will be looking different to the one they left behind in December and we may be in the “next normal”.

 

Around the globe people are trying to move on from Covid-19 – some more successfully than others. Low vaccination rates, Covid-19 outbreaks and new variants are testing countries.

 

After two years of various forms of lockdowns the psychology of the response is changing.

 

Governments are wanting to move on from crisis mode, open borders and relax restrictions on the lives of their citizens, and businesses are desperate to find more solid ground on which to re-start.

 

There’s a desire to try and get back to the way things were pre-Covid-19.

 

But during the two years of the pandemic a lot of change has been baked in. Just like after 9/11, the world has changed forever.

 

People have had time to reflect on their lives and what’s important, the 9-5 office day has crumbled, customers have accelerated moves to be more digital, and businesses have realised they need to be more intuitive with their customers and more environmentally sustainable.

 

In 2022 Covid-19 will still be with New Zealand but most have decided it’s time to start paddling the waka again. The year may be key in setting the course for the next few decades.

 

Politicians, and business and community leaders should have learned lessons from the past two years for this next normal. It’s not about returning to pre-Covid-19 times.

 

Look for CEOs to become “Chief Growth Officers”, while politicians shouldn’t be afraid to rethink where they invest public dollars and what regulatory and social settings New Zealand will need to recover.

 

Fortunately, New Zealand won’t be starting from a bad position - the economy has fared better than many predicted.

 

New Zealand’s terms of trade are at record highs. Farm gate returns for dairy, lamb and beef are expected to remain at elevated levels for the 2021/22 season. Unemployment is at record lows and construction continues to go gangbusters.

 

The economic recovery, though, is uneven. Closed borders have hit tourism, education, horticulture and other industries that rely on overseas customers and workers. And socially, the disparities in society have been widened by Covid-19 and will need to be addressed.

 

One of the biggest stories of 2022 will be housing and interest rates - again.

 

Increases in the Official Cash Rate (OCR) at the last two Reserve Bank monetary policy announcements, together with increasing wholesale funding rates, have lifted interest rates off historic lows.

 

The Reserve Bank has been warning for a while that house prices are overvalued, and we agree.

 

We expect the Reserve Bank will continue tightening the OCR in 25 basis point increments until it’s satisfied the balance of risks around its inflation and full employment mandate are balanced. We’ve pencilled in an OCR rate of 2% by August 2022.

 

A lot of ducks are lining up for house prices to at worst go backwards for a while and at best to cool in 2022. Amongst many things, this could have a dent on consumer confidence resulting in Kiwis becoming hesitant to spend.

 

The global supply chain infrastructure will be challenged in 2022 as economies try to accelerate. Moving goods around a globalised economy will remain difficult and is an issue for a nation at the bottom of the South Pacific.

 

The year will be different from the post-global financial crisis period after 2008 when creating demand in economies was the problem.

 

With all the quantitative easing at home and abroad at the beginning of the pandemic there’s plenty of demand, turbo-charged still further by people spending their money on goods since travel has been curtailed. Now, the supply side can’t keep up.

 

The impact of this is inflation and it seems likely New Zealand will top 6 per cent in 2022. Opening the borders won’t immediately solve our labour supply issues and with unemployment at record lows, there will be an impact on wage and salary demands next year.

 

One of the most significant changes facing businesses in 2022 will be an accelerated emphasis on managing and reducing environmental risk.

 

Sustainability is increasingly on the minds of shareholders, investors, business leaders, iwi and policy makers.

 

While many entities have already taken steps in this direction, considerations around environmental impact are to become a must in doing business.

 

In New Zealand, new rules will require banks to report on the climate change risks of their operations, and those of customers they lend to, from 2024.

 

This will fundamentally change how banks assess the risk of who they lend to. It will result in significantly more lending being directed to those who are transitioning to sustainable business models and investing in green technologies.

 

It’s important people get their heads around climate change requirements being more than compliance or another obligation or layer of bureaucracy being added to business.

 

It will probably result in New Zealand’s greatest productivity uplift since post the Second World War and, done well, could add enormous value to our exports and country’s brand.

 

Whatever happens with the pandemic, interest rates or global markets, New Zealand is in a much stronger position than most - with robust banks, strong company balance sheets, plenty of fiscal headroom, and an export basket that heavily features produce the world wants.

 

This year promises to be a pivotal one – possibly the start of a better, economically stronger, more agile and sustainable Aotearoa. This is the next normal.