'Scarring' to hold back economy in 2022 - bank

Economists are warning not to expect an economic recovery from this lockdown as strong as last year's, with COVID-19 here to stay.

ASB on Friday released its latest economic forecast, subtitled 'Living la Vida COVID' - predicting inflation to keep rising over the course of 2021, the official cash rate to do the same through 2022, but house price growth to slow to a crawl. 

A record hit to the economy in the second quarter of 2020 was followed by an even greater boost in the third, after the virus was eliminated and the country enjoyed the freedoms of level 1, pent-up demand driving 13.9 percent GDP growth.

But this latest lockdown - at least in Auckland - has been longer, and failed to wipe out the more infectious Delta variant. 

"It's just going to take a little bit longer until we overcome this last lockdown," ASB chief economist Nick Tuffley told The AM Show. 

"Last year everything went really well - we came out of it, we went back into level 1, we had a huge amount of support from the Government and low interest rates. 

"We went on a spending and housing binge - we're just not going to see that same kind of momentum this time. We've already got about 15 television sets and three extra houses now."

The Auckland economy will face "scarring" after more than three months of lockdown, Tuffley said, and the rest of the country - much of which hasn't had to deal with local cases of COVID-19 since 2020 - will have to get used to the ever-present threat.

There's also the uncertainty of how the new COVID-19 Protection Framework - the 'traffic light' system that's replacing alert levels - will affect people's spending and behaviour. 

Inflation, driven by high employment and cost pressures, is expected to reach 6 percent by the end of the year - the highest in 30 years - and remain above 3 percent through 2022. 

There is some good news though - with supply increasing, rising interest rates and the Government cracking down on speculators - house price growth is expected to drop from 30 percent year-on-year to 2.5 percent by the end of 2022, possibly below inflation. 

"We're now seeing increasing evidence of momentum cooling. Home lending has dropped from its prior break-neck rate," Tuffley said. "The pace of turnover has also eased up, aided by the shift up in alert levels in parts of the country. Most importantly, mortgage rates are now rising rapidly and we expect further lifts ahead.

"Overall there's definitely some positives in the coming months as we get more used to living with COVID, and we should start seeing New Zealand return to a new level of normality midway through next year."

The full ASB report can be read online