Coronavirus: Omicron, red light setting to knock GDP, strong economic tailwinds 'dying out' - forecast

The strong economic tailwinds that have supported the country throughout the pandemic appear to be fading, as the country grapples with rising inflation and a constrained labour market.

A new forecast from the economics consultancy, Infometrics, suggests the emergence of the Omicron variant and the transition to the red traffic light setting would likely knock between one and two percentage points off gross domestic product during the first half of the year.

Expectations of a spike in case numbers, as well as restrictions on large gatherings, would also feed into households' hesitancy at going out and spending, the firm said.

"The resilience of household spending continues to be a key factor underpinning New Zealand's good economic performance throughout COVID-19 and contributes to a robust outlook," Infometrics chief forecaster Gareth Kiernan said.

"But the tailwinds that have supported strong spending outcomes throughout 2020 and 2021 are dying out, and consumers will be less able to drive economic growth to the same extent during the next two years."

Households are expected to come under financial strain in the coming months, as wage growth (2.8 percent) was failing to keep pace with rising inflation (5.9 percent).

"With mortgage rates set to finish this year more than two percentage points higher than they were 18 months ago, and the official cash rate set to reach 2.75 percent in 2023, mortgage repayments are also rapidly increasing," Kiernan said.

The Infometrics forecast indicates annual house price growth will be about 5 percent by the end of the year.

This was based on the unintended credit crunch caused by recent changes to the Credit Contract and Consumer Finance Act, tougher tax rules for investors, increased loan-to-value requirements and residential building consents at record highs, suggesting more homes will come to market over the next 12 months.

However, it said the increase in stock was making up for underbuilding in the past and would not bring house prices down to affordable levels for first-time buyers.

"Most critically for the housing market and broader economy, the labour market is set to remain tight during the next three years," Kernan said.

He was forecasting unemployment to remain below 4 percent until the end of 2024, even with borders starting to reopen before then.

"Labour shortages will be an increasing constraint on the economy, and these limitations will contribute to economic growth slipping below 2 percent per annum during 2024."