Coronavirus: Economist Cameron Bagrie warns of business hit amid concerns Omicron will create 'massive labour disruption', lower cash flow

A leading economist is warning New Zealand is about to suffer an economic blow, pointing to the likelihood of "massive labour disruption" and lower business cash flow as the Omicron community outbreak worsens. 

Businesses have been reporting a drop in sales and customers in recent weeks since the country recorded a handful of Omicron community cases and the country moved to the red light settings. 

While red light isn't a lockdown and businesses can still operate, they say people are staying home out of fear of the COVID-19 variant. Cases have surged dramatically in the last few days, jumping to 981 on Monday, prompting the Government to move the country to Omicron phase 2 from Tuesday night.

Cameron Bagrie, the former ANZ chief economist, says foot traffic is down about 20 percent, and while some of that has moved from the city centres to the suburbs, he warns businesses are about to be hit hard as more people are forced to isolate. 

"We're going to take an economic hit in the next six to eight weeks as we go through massive labour disruption. Business cash flow is going to get disrupted," he told AM.

"The Government needs to be firing some money into the economy in the form of a resurgence package, wage subsidy, whatever they sort of like to do it. But there's going to be a massive cash squeeze in the next two months at a time when the Reserve Bank is going to be making life even more uncomfortable by lifting interest rates."

To reduce the burden on businesses who see a large chunk of their workforce out of action isolating, the Government has created a test-to-return scheme for phase two. It allows critical workers to go back to work if they return daily negative tests.

But workers can't use the tests to head out to the shops or to dine at a restaurant. That means more people stuck at home at night and on the weekends and fewer people visiting businesses. 

"We're heading into what could be termed an effective lockdown," Bagrie said. "I think we are already there."

"If you look at the red light level, it's sort of a [alert level 2.5]. If you look at foot traffic across what we're seeing across CBDs around the country… we're effectively what looks like an alert level three. Some would say it's an alert level four in regard to people just not going out."

"We're going to take an economic hit in the next six to eight weeks."
"We're going to take an economic hit in the next six to eight weeks." Photo credit: Getty Images.

Bagrie said the Government should fire more money into the economy over the next six weeks.

"We are going to be facing an almighty cash squeeze, particularly for those small businesses."

Research commissioned by business management platform MYOB released on Friday showed 32 percent of SMEs were already seeing fewer sales, 27 percent said their customer numbers were down and 22 percent said there was pressure on cash flow.

After seeing spending plummet last year largely due to the Delta outbreak, central Auckland businesses are crying out for support, Heart of the City chief executive Viv Beck said on Monday.

"Targeted financial support is the only option unless there is a significant change in the approach to the COVID response - such as changing the isolation rules, making RAT testing available for all businesses, getting people safely back to the office, bringing a managed border opening forward. The end of the month is looming and rent payments are due, and we are hearing of closures daily."

She said the city remains open for business and there are safe activities under the red light settings.

"The reality is that there was a marked drop in the number of people here when we moved to red - businesses are open but many of their customers are not here. The wider macro-economic story is now echoing what we are seeking on the ground and we need this to stimulate Ministers and officials to move quickly."

"The Government is continually monitoring the impact of the COVID pandemic on businesses."
"The Government is continually monitoring the impact of the COVID pandemic on businesses." Photo credit: Getty Images.

Finance Minister Grant Robertson said last week that advice he has received from Treasury shows the economic impact of the red setting was estimated to be 2 percent to 5 percent of GDP, compared with 4 percent to 6 percent under alert level 2. 

"In terms of support, the Small Business Cashflow Loans scheme is still open for applications until December 2023. The Commissioner of Inland Revenue is also able to offer deferred payments on some tax obligations," he said.

"The Government is continually monitoring the impact of the COVID pandemic on businesses, including up-to-date sales data. As with the recently announced arts and creative sector package we are considering whether targeted support for some sectors is necessary."

The Government's Leave Support Scheme pays a flat rate of $600 per week per full time worker and $359 per week per part time worker if workers have to self-isolate because of COVID-19 and can't work from home. 

The Short-term Absence Payment pays employees who can't work from home while they await a COVID-19 test result. It is a one-off payment of $359 per eligible worker.

Bagrie told AM the Government is also "in a bit of a pickle here" due to 30-year high inflation. 

"You want to be pushing money into the economy to support businesses. But the more money you push into the economy, the more you could drive up that inflationary impulse and it's really tough at the moment to get that balance between the two."

He said 2022 is the "year of reality and reset", with the Reserve Bank having a big task ahead of them to fulfil their objectives of maximum sustainable employment and low inflation. 

"They're going to keep waving that interest rate stick. Interest rates moving up is not growth or asset price friendly," he told AM. 

Kiwis are currently paying more for less, with Consumer Price Index (CPI) figures released in January showing annual price inflation to be up 5.9 percent, the biggest yearly jump since the June 1990 quarter. On Monday, StatsNZ said food prices had grown 2.7 percent in January. 

House prices also continue to rise, with Real Estate Institute of New Zealand data out on Tuesday showing a 20.5 percent increase over the last year in the median residential property price. 

Unemployment is at 3.2 percent, the lowest rate since 1986. It means there is an incredibly tight labour market.

The Reserve Bank moved the Official Cash Rate (OCR) up 25 basis points in November to 0.75 percent, following a 25 basis point increase in October. It's expected a similar jump is coming at the bank's February meeting and will continue through 2022.