As New Zealand moves into the government’s “traffic light” system for controlling the spread of COVID-19, there’s hope that the massive disruption of lockdowns on economic activity can be consigned to the past. There’s also hope that the strong rebound in activity following last year’s initial lockdown will be repeated as Auckland emerges into a less restrictive environment. But is that expectation overly optimistic?

Last year’s spending rush was fuelled by forced savings during lockdown, money diverted from international travel, and the stimulatory effects of massive fiscal stimulus and record low interest rates. Apart from rising mortgage rates since mid-2021, these drivers have not changed markedly over the last 18 months, so they mostly remain conducive to another spending rebound.

Our central view is that households generally remain in a good space and that spending will stay strong into 2022. But estimates based on Marketview and MBIE data suggest that spending activity in Level 2 areas in October (outside Auckland and Waikato) was up just 1.9% from a year earlier. Given that nationwide spending growth in July 2020, after the first lockdown, was a much stronger 4.8%pa, the latest data is sounding some alarm bells. And if we allow for price rises of almost 5%pa as indicated by the consumers price index, the volume of spending could be down about 3% from a year ago.

Consumer confidence hints at some of the issues that households are facing. Chart 1 shows that a net 4% of respondents to the ANZ-Roy Morgan survey think their family is worse off than a year ago – the weakest result in eight years.

There are valid economic reasons why households will be feeling nervous about their financial situations. Strong inflation is squeezing household budgets, especially given that salaries and wages have only increased by 2.4%, or half the CPI inflation rate, over the last year. Price rises have been widespread, but higher food, fuel, and housing-related costs are probably the most keenly felt. For example, petrol prices have increased at their fastest rate since 2008, climbing 38% over the last year to a record high. This lift is likely to have a far larger and more immediate effect on household spending than the Reserve Bank’s interest rate rises to date.

Nevertheless, don’t discount the effects of rising interest rates on household budgets over the next couple of years. Mortgage rates of just over 2% meant consumers had few qualms about borrowing to purchase cars or do renovations. This discretionary spending will be cramped by mortgage rates reaching 4% or more by the end of 2022, particularly for people who’ve borrowed heavily to get onto the housing ladder.

But it’s the health-related factors that are arguably less predictable and give us more cause for concern. Last year’s lockdown was short, sharp, and successful in comparison to this year’s prolonged restrictions in Auckland and Waikato. People are now having to adjust their mindsets to a future of living with COVID-19 in the community and, for some people, that future is troublesome.

At first glance, overseas indicators suggest the portion of the population who will be ultra-cautious is small. Data from OpenTable in Chart 2 shows that customer numbers at restaurants globally between July and October this year were down an average of just 3.5% from the same months in 2019, with the decline likely to reflect capacity limitations rather than reduced demand. The comparable figures in 2020 showed a 44% reduction as the pandemic hammered the hospitality sector.

However, the COVID-19 climate in New Zealand is vastly different to the one in the US or the UK. Up until October, Kiwis had become used to an approach that treated every single COVID-19 case with extreme concern. Now we’re being asked to potentially live in a similar situation to Singapore. Case numbers in Singapore have soared since the country started reopening in mid-August, climbing from 50 per day to a peak of almost 3,800, with the number of deaths reaching nearly 100 per week. Data since mid-September from Ireland and Denmark provides a similar cautionary tale, although death numbers in these countries have not risen as far, with recent weekly highs of 74 and 32 respectively.

Against this backdrop, it is not necessarily a simple transition for people to a mindset that accepts a higher risk of catching the virus, even when fully vaccinated and the likelihood of more severe infection is very low. Opening up in time for summer could see businesses not only competing over a shrinking pool of discretionary spending, but also a more cautious population. A significant proportion of households might prefer to stay at home more and stick with online spending options, which would further limit revenue for hospitality and tourism-related firms. What’s clear is that this summer won’t be quite as upbeat and carefree as last summer.

This opinion piece was published on Stuff on 5 December 2021.