The Hermit Kingdom

The Hermit Kingdom

“We are defined not by our borders but by our bonds”
Barack Obama

Prior to mid-August, the New Zealand economy was tracking very strongly, record low unemployment and strong GDP growth, which was going to see the Reserve Bank start a number of expected interest rate rises. This had already led to the main Bank lenders increasing medium to longer term mortgage rates, and economists predicting a strong jump in inflation. Then the reemergence of Covid in the community here, and the following stringent lockdown, resulted in the Country trading at 40-50% capacity and the Reserve Bank putting interest rate rises on hold, and a number of Banks who had increased their floating mortgage rates backtracking.

Most economists predict a strong bounce back once the Country is back at the freedom of level 1; however, this has just reconfirmed the uncertain times that we all now live in. The rest of the World is in the process of opening up and accepting that they have to live with Covid in the community, however New Zealand is in the envious position of being able to delay that until we have higher vaccination rates.

The question is, what is a high enough vaccination rate? The current Government says they are still pursuing a zero Covid policy, which most people acknowledge is the best option, if you can, whilst vaccination levels are under 80%- 90%, however, we can’t go on indefinitely locked off from the rest of the World with no income from what was our largest industry, tourism, and living in a state of 1 border slip-up away from future lockdowns. The Government have to date not demonstrated any ability to learn and plan from previous outbreaks, as an underfunded Healthcare system is still shown to be vulnerable to Covid outbreaks more than 18 months after the virus’ arrival in this Country.

Past decisions by this Government, in consultation with its advisers, have erred on the side of extreme caution, with regards our border restrictions, which to date have proved the right call. Are they prepared to put a line in the sand, and say at 80% + vaccination rates the border restrictions are lessened, or removed. This will mean future illness and deaths from Covid, – will they accept that?

It looks unlikely a travel bubble with Australia will reopen, as their 2 largest states are now living with the disease.  Some of these questions need to be addressed now, as it appears likely there will be a more aggressive variant of Covid always just around the corner, and the Country can’t be held to ransom by those not wanting to get vaccinated. The answer to some of these questions will hopefully be announced later today.

The opening of this Countries borders is becoming a major factor for industry, as they struggle to find adequate staff. A recent Building industry survey found that 40% of construction companies did not have adequate staff to meet current demand and 56% not enough to meet projected demand. We have also seen numerous press reports about a lack of staff in horticulture, and those tourism business’ that are back trading with internal tourism, short of staff.

A building industry construction supply chain report highlighted a number of current and pending issues for the industry in NZ, a number of these being

Shipping costs have increased 100% over the last 6 months- particularly relevant for this Country as 96% of building products sold here are imported or have an imported component in them.
The full effect of product price increases hasn’t yet flowed through to the market, most suppliers have absorbed the bulk of these to date, but they will start coming through.
NZ are competing Globally for freight & product, against other Countries booming construction industry – USA is in a 15-year housing boom, China & India’s construction industries are expected to grow 12.4% & 13% respectively.
NZ’s construction industry accounted for 0.1% of the Global industry in 2020.
And the shortage of staff, as detailed above.

Pricing and supply issues are now flowing through to fixed price construction contracts, as companies are not prepared to take the risk on product increases. Financiers will have to assess their requirements around these, and already we are seeing both contract terms extended, and contingency sums increased.

Development funding packages need to be flexible enough to cover delays and price rises, otherwise the cost to the borrower can be large.

The non-Bank market is still very active, with us getting transactions approved and settled, even when the Country was in Level 4. So please contact us should you have a transaction you want looked at.