The effectiveness of Covid-19 vaccines is going to have a bearing on the economy in 2021. Photo / AP
This time last year, no one picked a global pandemic was the economic trend to watch in 2020.
As part of an annual look ahead, the Herald asks New Zealand's leading economists to pick the key indicators or trends they'll be looking at in the year ahead.
This year a combination of Covid-19 factors tops the list of things New Zealand's leading economists will be watching in 2021 as they seek to assess our progress and forecast our outlook.
Beyond that, the perennial local favourite of housing dominates again, along with business confidence, government spending and inflation.
Perhaps one of the strangest economic twists to the 2020 year was the extent to which Covid-19 didn't blow traditional economic indicators out of the water.
With the obvious exception of the closed border and the lockdown, life in New Zealand has largely been normal enough that the traditional economic indicators remained relevant.
Last year's top trends to watch were: credit conditions, house prices, business confidence, politics and inflation.
If anything, Covid heightened the intensity of politics even more in the past year.
Businesss confidence remains an interesting barometer - reflecting the "better than expected" performance of the economy in the second half of the year.
House prices also roared away with surprising strength.
One of the reasons for that was undoubtedly credit conditions - which were fuel injected by the Reserve Bank as a response to the pandemic.
And inflation? Well, not a big factor in 2020 but still one of the most fundamental indicators for many economists as this year's list reveals.
The pandemic - vaccine rollout and border re-opening
This year ahead will still be all about Covid-19, says BNZ chief economist Stephen Toplis.
"The world will be weighing up the immediate impact of exponential growth in the spread of the virus against the hopes that vaccines will eventually win the day," he says.
"As the tug of war between the two intensifies, the fallout on global sentiment and demand, and the impact of these on financial markets will be of paramount importance to New Zealand's progress."
Toplis believes the ongoing effectiveness of New Zealand's border management will probably be the single biggest factor shaping our destiny in the year ahead.
Most others agreed.
The speed and efficiency with which we can open the borders will be "key to saving jobs in the tourism sector as well as relieving labour shortages", says ANZ chief economist Sharon Zollner.
Border policy will flow into our net migration figures, notes Infometrics chief forecaster Gareth Kiernan.
These numbers and what happens to them from there will have big implications for the housing and labour markets, he says.
Watching the progress of the vaccines will be crucial for economists.
"Hopefully we see an array of potent vaccines spreading across the globe, and hopefully at a faster pace than the virus itself," says KiwiBank chief economist Jarrod Kerr.
"We want 2021 to be a year of cross-border bubbles and border openings."
Getting good data on progress will be important.
"[It's] not actually being reported yet to my knowledge, but I suspect that global data trackers will soon emerge to meet the demand for this information," says Westpac senior economist Michael Gordon.
"Markets and forecasters have essentially placed their bets on how quickly the vaccination programme will be rolled out and when life around the world could return to something more like normal. Now those views will be put to the test."
House prices
There's not many years in recent history where this hasn't been a big factor in New Zealand's economic outlook.
"It is an influence on the pace of retail spending and residential construction," says ASB chief economist Nick Tuffley.
It will also play a part in influencing monetary policy, macroprudential policy, as well as the broader government focus on housing costs and social issues created by continued price increases, he says.
"This matters from many different angles – financial stability, wealth inequality and social stability," says Tuffley.
"We have seen housing demand increase sharply in recent months in response to a combination of factors which has seen the [expected] return on investment far outweigh the cost of borrowing."
High house prices pose a risk to financial stability if any negative shock meant heavily indebted households were no longer able to service their mortgage, and this has negative flow-on effects on bank balance sheets.
This year, house prices need to be watched through a social lens not just an economic one, says independent economist Cameron Bagrie.
"The economic and social ledger is far too disconnected and housing is one culprit."
As NZIER's Christina Leung notes: "The longitudinal study Growing Up in New Zealand highlighted the importance of secure, stable housing to the life outcomes of young children, with high frequency of moving house identified as a risk factor for the households into which babies are born into."
Business confidence/business investment
These are two sides of the same coin, in the sense that when business people are confident they are more likely to invest - creating jobs and economic growth.
"For the recovery to become broad based, businesses are going to need the confidence to invest," says Bagrie. "We need that money being hoarded at banks to be put to work."
As ASB's Tuffley puts it: "Credit is contracting, deposits are rising. Businesses have access to funding but are not taking it up as yet."
A change toward increasing credit growth and the running down of deposits will be signs that businesses are more prepared to put cash to work, he says.
Meanwhile, the level of confidence will remain an indicator for those borrowing and investment trends, says Leung.
"Confidence has been recovering as lockdown restrictions were lifted and the New Zealand economy has proved more resilient than expected, buoyed by the unprecedented amount of stimulus injected into the economy," she says.
"Whether this confidence continues to pick up will determine how sustainable the recovery is over the coming year."
Inflation
Kind of like the Force in Star Wars, inflation is the economic phenomenon that underpins the value of everything. What it's doing is key to monetary policy and the real growth for the economy.
"Effectively the economy's temperature gauge, inflation is currently running well below target, and hasn't consistently been at the 2 per cent mid-point of the RBNZ target band for around a decade now," says Westpac's Gordon.
"How it evolves over the coming year will tell us a lot about the need and scope for further monetary stimulus."
But while inflation has been missing in action for a decade, the prospect of global post-Covid euphoria has economists wondering.
"There is a building case for inflation turning up after years of dormancy," says Bagrie.
"We have not seen this sort of cost-push inflation pressure for a long time."
Inflation pressure isn't the central scenario because demand normally caps cost-push pressure but it is now a scenario that can be credibly put on the table, he says.
He cites unwinding globalisation, addressing climate change, bigger government and redistributive policies as inflationary over time.
The NZ Initiative's Oliver Hartwich points the finger at the big quantitative easing programmes of central banks around the world.
"It's roughly the same story for central banks around the world – but it's not sustainable in the long run. We cannot solve all our problems with freshly created money."
If it does turn up in 2021, it could have some very serious consequences as interest rates would have to rise.
"It's assumed to be dead but central banks, and therefore financial markets, are in trouble if it isn't."
The fiscal position
A new entry in the top five this year is a sharper focus on the Crown accounts - which have been hit pretty hard by borrowing for the pandemic response.
"The evolution of the government's books will be worth keeping a close eye on," says BNZ's Toplis.
"At the moment it looks like deficits and debt will not be as large as previously feared. This will take pressure off funding markets and interest rates. The flip side, though, is that it provides the government with greater opportunity to stimulate the economy if needs be."
It is all about quality not quantity, Toplis says.
"We are not concerned with rising government debt as long as the funds raised are being used to deliver a solid future return to the economy."
The NZ Initiative's Hartwich says he is curious to see whether the government will manage to keep the deficit below the initially feared path.
"The original forecasts were horrifying, but the economy turned out more robust than anticipated. So will we also see this reflected in debt and deficit figures?"
Bagrie puts it bluntly: "We are entering an era of bigger and more interventionist government," he says.
"They need to deliver quality or taxes are going to follow the Edmonds cookbook and rise a long way."
Honourable mentions:
Jobs
"Considering that hiring usually lags the economic cycle, the rapid rebound in job ads this year was one of our earliest and best indicators that this wasn't going to be a typical downturn," says Westpac's Gordon.
Infometrics' Kiernan will look to Ministry of Social Development Weekly Jobseeker Support numbers.
"If we can come out the other side of summer without another significant increase in Jobseeker numbers, that might be just about as bad as the labour market will get."
Climate change policy
Toplis says the government's environment agenda, in particular the swathe of decarbonisation announcements expected throughout the year, will be significant.
"There are huge regulatory changes ahead," he says.
"This will have a significant initial cost impact on business. Agriculture and transport will bear the initial hit but no business will escape the need to change."
Export revenue
Export revenues held up remarkably well in 2020 despite Covid, says Kiernan.
"How do they go during 2021 given the pandemic's effects in Europe and North America, as well as concerns about China's foreign policy, exemplified by how they've interacted with Australia over the last few months?"
The Americas Cup
"Come on," says KiwiBank's Kerr. "It's the best event in the world right now. And another Kiwi win would enable us economists to put another "Americas cup boost" in our forecasts over the next defence."
The labour market remained weak and disinflationary, economists say.