The outlook for franchising in 2022

As we enter the third year of the pandemic, the price of New Zealand’s largely successful approach to Covid is now revealing itself. So says Michael Gordon, Westpac’s Acting Chief Economist in his introduction to the February Economic Overview. ‘A strong economic recovery, aided by fiscal and monetary stimulus, is running up against constrained capacity. As a result, inflation pressures are building up in a way we haven’t seen for many years.

‘This is not to put the blame on policymakers. Their aim was to err on the side of doing too much rather than too little, and they deserve credit for achieving that – stubborn inflation is a better problem to have than stubborn unemployment. But there was never going to be a cost-free solution to a shock of this nature, and the bill is now coming due.

‘In this respect, New Zealand differs from the rest of the world only by a matter of degree. Other countries are now waking up to the fact that they also have an inflation problem, and we expect to see several other central banks join the RBNZ in raising interest rates this year.’

Here are some of the key points:

New Zealand economy

‘2022 is shaping up to be another challenging year. Covid is now in our communities and our approach to managing its spread has changed. At the same time, supply disruptions and shortages of labour are widespread, and interest rates are pushing higher in response to surging inflation. Against this backdrop, we expect a return to firm levels of economic activity over the coming year, but with significant differences across sectors and regions.

‘We expect that economic growth will remain sluggish through the early part of 2022, but that conditions will firm through the latter half of the year as the Omicron related disruptions fade. Against this backdrop, the labour market is expected to remain very tight, with unemployment on track to fall to just 3% over the coming months.

‘With mortgage rates set to continue rising over the coming year, we expect a further cooling in the housing market over 2022, with prices expected to drop by 5% over the course of this year. But while that is a stark turnaround, the expected price declines would only reverse a small portion of the gains seen in recent years, meaning that housing affordability is set to remain stretched relative to incomes.’

Global Economy

‘The world economy will continue to grow at a solid pace in 2022, setting aside some Omicron disruptions in the near term. But with inflation pressures building, central banks will increasingly be acting to rein in demand this year. We expect both Australia and the US to increase their policy rates several times by the end of the year. In contrast, China is easing policy to ensure that investment can firmly take the baton as the major driver of growth.’

Agricultural Outlook

‘New Zealand commodity prices are in the midst of a perfect storm. At the heart of the storm is Covid and its variants pushing supply chains to breaking point. Indeed, record high commodity prices are going hand in hand with record high input prices. Normally, we’d expect such increases to prove short-lived. However, there is a structural element in play, meaning some commodity prices are set to remain high for longer.

‘Another factor helping agricultural returns has been a weaker New Zealand dollar. Indeed, the weaker currency has lifted all commodity boats. The NZD/USD is currently trading at around US$0.66 from over US$0.70 in late 2021. In the short term, we expect this weakness to continue. Over the March and June quarters, we expect the NZD/USD to trade at around US$0.65, before the New Zealand dollar strengthens towards the end of the year.’

Inflation and the RBNZ

‘Inflation has risen to a multi-decade high, driven by a cocktail of global cost pressures, supply constraints and strong demand. As the year progresses, it is domestic factors that will largely account for where the inflation rate settles, and therefore how strong a monetary policy response will be required. Our view remains that the OCR will reach a cyclical peak of 3% next year.’

The outlook for franchising

The Westpac Economic Overview generally provides a good indication of expectations for the coming year, sometimes erring on the pessimistic side, as economists often do. Accordingly, it’s good to see many positives among the negatives. However, while the Government has announced target dates for a staged opening-up of the borders and signalled an eventual end for vaccination mandates, the ongoing uncertainty as to when Omicron will peak remains frustrating for franchisors and franchisees.

This was reflected in the recent Franchising Confidence Index survey, which was conducted by Franchize Consultants during January at a time when the country had just moved back into red and the severity of Omicron was not yet confirmed. That survey found sentiment among franchisors and specialist service providers to be at its lowest for 12 years for some key measures, including availability of staff, access to financing and franchisee operating costs. All nine indicators in the survey had declined from January 2021, when the country as a whole was enjoying a relatively Covid-free summer.

Should New Zealand follow a similar trajectory to the UK, where all restrictions were removed after the Omicron outbreak spiked 6 weeks ago, we could be looking at April before restrictions are eased here, and longer before people are happy to flood back to city centre office, shops, cafes and restaurants. The support package recently made available for businesses, which is considerably less generous and comprehensive than previous ones, will not be enough to save some of those businesses, franchises included. At a time of almost full employment, finding staff is the other major challenge.

Having said that, franchising covers a wide variety of industries, and there are several sectors which responded to the survey with cautious optimism, including construction, renovation, logistics, retail and commercial cleaning. In some sectors of home services, too,  demand is outstripping capacity, meaning plenty of opportunities for new franchisees.

Even among badly-affected sectors, franchisors are seeing opportunities ahead. According to the Franchising Confidence Index. ‘Key themes identified by franchisors include better availability of premises/sites, increased number of potential franchisees (from people returning to New Zealand and people looking for self-employed opportunities), market share gains from failing competitors, diversification into other new products and services and new channels (e.g. e-commerce).’

Read the full Westpac Economic Overview

Read the full Franchising Confidence Index report

 

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