What to expect in 2022
By independent economist Tony Alexander.
There is a rule of thumb many of us have been running with for some while now. Shocks to our economy occur roughly every 10 years. This reflects the occurrence of the second oil price shock over 1977/78, share market crash of 1987, Asian Financial Crisis of 1997/98, Global Financial Crisis in 2008/09, then the Covid-19 pandemic from early 2020 – somewhat overdue according to the usual timetable.
The current shock has pulled consumer spending patterns apart to a degree never seen before and, in particular, spending on durable goods such as couches and cars has done exactly the opposite of what has happened in every previous shock.
As a rule, if people grow fearful of their jobs, they do not feel inclined to buy durables like home furniture, spas, kayaks, and motor vehicles.
Yet sales of all of these ‘lumpy’ items have soared around the world after initially falling away during the first throes of lockdowns early in 2020.
Our inability to keep spending on international travel, sustained employment from government support schemes, record low borrowing costs, and desire to improve our locked down living environments has generated a surge of spending on durables. Sales of motor vehicles have been further assisted by people holidaying within New Zealand rather than overseas, and perhaps also by a swathe of older people choosing to retire earlier than planned and updating their vehicles at the same time.
Can this strong demand for cars and couches continue? No. It has been expected for some time that as we get towards the end of the pandemic, consumers around the world will switch their spending back towards services such as travel and entertainment and away from durables. In fact, for durable goods there is some downside risk in sales that might catch some operators out. Generally, we only need a new piece of furniture every 10 to 15 years and speaking personally, tend to upgrade my car only every 15 to 20 years.
So, as we progress through 2022 into 2023, we are likely to see consumer demand for motor vehicles edge down. Assisting this easing in demand will be the high pace of increase in the cost of living as measured by the inflation rate. The latest rate is 4.9 percent, but data soon to be released are likely to show a rate close to
6 percent. With wages growing less than 4 percent on average, this decrease in real spending power will negatively impact most areas of household spending.
In fact, when our borders properly open up, we could easily see a strong outflow of Kiwis to our traditional ‘escape’ labour market of Australia where wages are a lot higher, house prices lower, and the cost of living is better.
Expect supply issues
But there is a key problem with this analysis as presented so far. It concentrates on demand for motor vehicles and other durable goods. But these days the bigger issue for many businesses is availability of goods and materials. Will the supply chain problems affecting vehicle production, sharply higher shipping charges and lagged delivery times ease? Eventually, yes. But that might be a story more for next year than for 2022.
The Omicron variant of Covid-19 is bypassing some vaccination protection and causing the biggest surge in people calling in sick ever seen. This is disrupting the ability of businesses to function in affected countries and it looks like all countries will eventually go through this phase. That is part of the problem.
Most goods, including motor vehicles, are made from parts sourced across a wide range of countries. As one group of countries passes through what looks to be about a two-month period of extreme worker absenteeism, another group will start their process. Australia, for instance, will experience declining numbers of new infections and worker absences before our surge starts.
This rolling through of production interruptions will compromise supply chains this year – particularly when China eventually abandons its continuing eradication strategy and accepts the passing through of Omicron.
The upshot is that for 2022 ongoing supply chain disruptions will tend to keep raising vehicle prices at the same time as demand starts to pull back largely in the consumer market. And 2023? Hopefully by then supply chains will be much improved. But the by then much weaker housing market and even higher interest rates will further subdue consumer demand. However, that’s a story for another day.