The Omicron outbreak threatens an economy that was just starting to get back into its groove.
Kiwibank chief economist Jarrod Kerr said Omicron posed a key risk to the New Zealand economy and would likely place further pressure on the already-stretched labour market.
Today Prime Minister Jacinda Ardern announced the country will move into the red traffic light setting at midnight tonight with Omicron now circulating in Auckland and possibly the Nelson area, if not further.
With borders closed and heightened commerce restrictions, the strain on the labour market will only increase.
"While Omicron appears a less severe infection than earlier variants, many workers in the US and Australia have been kept at home, exacerbating labour shortages," Kerr said.
"Labour shortages are acute here in NZ and would be exacerbated by an Omicron outbreak."
The Trade Me jobs data out last Thursday showed New Zealand ended 2021 with a record number of 69,600 job vacancies for the final quarter – a 25 per cent increase from the same period a year prior.
The tight job market conditions have contributed to the national average salary jumping 6 per cent to reach a record-breaking $66,946, according to Trade Me jobs sales director Matt Tolich.
The largest increase in average pay was seen in the Auckland region with a whopping 9 per cent year-on-year increase to a figure of $71,556.
These jumps in salary do, however, coincide with a period of high inflation for the country – which, according to Kerr, shows little sign of abatement.
"Here in Aotearoa, CPI inflation hit almost 5 per cent in the September quarter, the highest rate seen in around a decade," he said.
"And inflation hasn't peaked yet. We are forecasting CPI inflation hit 6.1 per cent in the December quarter.
"From there, inflation is expected to gradually ease but remain above the RBNZ's 1-3 per cent target band for most of 2022."
Globally, reserve banks have responded to these inflationary pressures by raising interest rates.
The interest rate on the 10-year US Government bond has lifted from 1.5 per cent to 1.79 per cent this week, near the top of its range over the past two years.
Locally, the country's largest bank, ANZ, warned the official cash rate could rise to a peak of 3 per cent over the next 15 months – up from the current 0.75 per cent.
ANZ chief economist Sharon Zollner warned inflation is starting to look less transitory than it was previously perceived.
Mark Lister, head of private wealth research for Craigs Investment Partners, told the Herald the Reserve Bank would find itself in a difficult position if it keeps hiking rates to bring inflation down, while the economy is facing additional headwinds from a disruptive Omicron outbreak.
Regardless of the severity of the Omicron variant, Lister said an outbreak would be disruptive for the economy.
"We will face more restrictions, increased absenteeism, reduced productivity and ultimately some businesses will suffer further. Sadly, it will be hospitality, tourism and retail that will be hurt most," he said.
Asked about the impact this might have on the sharemarket, Lister was optimistic our listed companies would be able to weather the storm again.
"Our sharemarket might actually take it in stride, and the impact could be relatively muted. It doesn't perfectly represent main street New Zealand, because most of our market is dominated by large, defensive companies, rather than the smaller, more economically sensitive ones that could feel the brunt of an outbreak more acutely," he said.
"Ironically, our sharemarket often performed better during uncertain times."
Lister hopes local decision-makers take note of steps other countries have taken against Omicron.
"I think the UK is a good example of how we need to learn to live with Omicron, being the first developed economy to deal with an outbreak," he said.
"While the number of cases went through the roof in the early days, the increase in hospitalisations was much more muted. Omicron is more transmissible but much less severe, so we shouldn't fear an outbreak to anywhere the degree we did for Delta.
"I hope the authorities recognise that and don't punish businesses and workers by reacting too aggressively. A pragmatic response is what I'll be hoping for."
The United Kingdom this week lifted Covid restrictions, as the Boris Johnson Government said the wave had peaked.
Masks will no longer be mandatory in public places and Covid-19 passports will be dropped for large events, sending a clear signal the nation would learn to live with the virus.
Britain has one of the worst pandemic death tolls in Europe: 153,00 confirmed deaths.
The UK isn't alone in easing restrictions amid the ongoing Omicron cases. The United States, the Netherlands, Italy, Spain and others have either lifted restrictions or are in the process of easing them.
The more widespread relaxation of restrictions abroad will result in increased demand abroad, which could have an impact on the local market.
International oil prices hit a seven-year high of more than US$88, with some analysts predicting a price as high as $100 over the course of 2022.
This surge in price will spill over into the local petrol market, placing further pressure on Kiwi wallets.
AA principal policy adviser Terrence Collins predicts the price of petrol in New Zealand could hit a record high of $3 per litre this year.
This will have a knock-on effect, impacting food production, transportation and ultimately prices.
The latest data from Stats NZ the annual food price increased by 4.5 per cent in December in comparison to the same period in 2020 - the highest rate of growth in a decade. Rising petrol prices will only place further pressure on the amount Kiwis have to fork out at the supermarket checkout counter.
As the spectre of Omicron grows in New Zealand, the Government will face a tough task in managing the local response within the global economic context of high oil prices and surging inflation.
The coming 12 months will be a tight balancing act for key decision-makers.