Kiwi households are "rapidly clamping their wallets shut" and it is unlikely we will see a recovery in household expenditure this year, according to ASB economists.
In ASB's Economic Weekly publication, senior economist Kim Mundy says weak retail data (showing a third consecutive quarter of falling sales by volume) released last week "reinforce our suspicions that the New Zealand economy remained in recession" during the second quarter of 2023.
According to Stats NZ, the New Zealand economy shrank in both the December 2022 and March 2023 quarters (albeit by a tiny amount in March). Two consecutive quarters of negative GDP growth fits the description of a 'technical recession'.
GDP figures for the June quarter are not due to be released till September 2021. General expectation among economists had been for something of a 'bounce' in activity. The Reserve Bank has forecast 0.5% growth. But that was before the latest June quarter retail data came out.
"Spring might be just around the corner, but there’s still a discernible chill in the air if last week’s economic data is anything to go by," Mundy said.
"At best, we see quarterly economic activity flitting between small positives and negatives over the remainder of 2023.
"In per capita terms the economic downturn will be much more pronounced," she said.
ASB economists had been "slightly surprised by the extent of the pullback" in household spending so far in 2023.
"Despite the headwinds (the high cost of living and rising mortgage interest rates) there were also some tailwinds floating around in the first half of the year.
"Households were collectively still sitting on some $30 billion of savings accrued during Covid, nominal wages were rising at a historically fast pace and high net immigration has been boosting the population (and by extension, demand).
"However, those tailwinds are fading while the headwinds remain very much in play."
Mundy said dampened consumer demand and slowing/falling economic growth are necessary but not sufficient conditions for the RBNZ to declare victory on inflation.
"Less demand will help bring inflation down over time, but there is still evidence of inflation stickiness in some pockets of the economy that will be of concern to the RBNZ.
"It’s unlikely to be until weak demand feeds through into materially lower wage and price growth that the RBNZ will feel its mission is accomplished."
ASB economists think the current Official Cash Rate of 5.5% will be the peak in this cycle.
"But the RBNZ’s desire to make sure inflation is well and truly back in its box suggests OCR cuts are a long way off (about 12 months away within our forecasts)."
Kiwibank's economics team of chief economist Jarrod Kerr, senior economist Mary Jo Vergara and economist Sabrina Delgado say in their weekly First View publication that while global central banks are signalling a hawkish bias, "downside risks to the economic outlook are clear, present and growing".
"An underperforming Chinese economy with a faltering property market, high levels of youth unemployment and weak activity is the darkest of grey clouds hovering over the horizon."
They say that waning global demand, and lower commodity prices remain a driver behind their call for no more OCR hikes and cuts as early as May.
They said last week's "grim" retail data was "all the more concerning when you take into account the surge in net migration we’ve been seeing over the year".
More people normally means more demand, more activity, and more sales, but the latest retail figures proved that interest rates are dominating and "squashing disposable incomes", which has added "some pressure and downside risk" to the rise in GDP they are expecting to see over the June quarter, the Kiwibank economists said.
"From their weekend brunches to DIY projects around the house, and the latest winters sales at the mall, Kiwis are saying goodbye to things big and small. Kiwis are tightening their belts, and domestic demand continues to shrink."
The economists say the retail trade data "is just one of many data points which have come in weaker than expected".
"And monetary policy works with a lag. There is still a lot of pain on its way for us kiwis. More than is needed to tame inflation."
66 Comments
That's the 'wealth effect' going from fewer cylinders into stall mode. I've highlighted the wealth as the be-all-and-end-all as the most important derivative of the bubble economics plan of Nu' Zillun. Perhaps expressed less elegantly than some, but definitely more tangible and real than the narrative from a conflicted comms exec from one of the banks (perhaps we should just refer to them as glorified mortgage houses as that's essentially what they are).
As do I.
When my older brother and his partner bought their house, my younger brother signed a letter to the bank saying he'd pay $200 a week in board and increased their pre-approval by $60k, despite having no intention of moving in.
When my friend (who already owned his house at that point) wanted to top up his mortgage, he pulled the same trick with one of our other friends, who never moved in.
Now I understand that verifying future boarder income at the pre-approval stage for prospective FHBs might not be feasible, but how difficult would it be for a prudent bank to say to an existing homeowner "OK, have him move in for a few months so we can see that money coming in, then we'll assess your request"?
Given this is such an easy way to bump your budget up by a fair bit, I'd be surprised if there were many FHBs who were desperate to just do anything to get their loan application over the line who didn't do this.
For me this raises the question - how many stress tests have been passed based on income that just wasn't there?
Yes, and that’s while this house price downturn is far from over. Don’t be fooled by apparent green shoots or OneRoof propaganda….the low level of new listings and sales hides the real situation of huge volume of pent up supply - people who want or need to sell but can’t bring themselves to do it yet. And every month more roll onto higher mortgage rates so pressure will continue building for some time
We have overcooked it with the rates rises. They have taken longer to have an effect due to those increased household savings and rising wages, but they will start to bite soon and hard. Just remember, two years ago today the OCR was only 0.25% and the average 2 year fixed mortgage rate was 2.8%.
Construction is dead because of the cost structure.
Dairy is dead because of China/alternate supply.
Retail spending, car sales and domestic tourism are dead because of the cost of living.
People earning money on Term Deposits and sitting on it are not going to do anything to save this. They will also feel poor because of reducing asset values.
GFC 2.0 coming in hot.
Its been all about managing your debt over the last few years. Those that were sensible smashed that mortgage while rates were a total joke at only 2%. It was inevitable this day would come but many could not help themselves and all they did was spend. Once you are debt free your ability to survive everything turning to shit improves greatly, in fact you get better off when TD rates rise.
I don't think we are in GFC territory - but we won't be far off.
Our challenge is that our trade deficit means that our whole economy is reliant on either (a) Govt spending a lot more than it taxes; (b) households and businesses taking on more debt than they repay; and / or (c) people spending their savings.
All of the above are currently switched firmly off and whilst that is the case we will continue our nosedive into high unemployment and misery.
I actually think it will be worse than GFC for NZ.
Because, during / after GFC we:
- were able to slash the OCR
- China boomed and we benefited
- we had the ChCh rebuild. Big economic shock, sure, but then big economic stimulus: ‘broken windows’ fallacy
First two aren’t happening this time. In fact, the OCR is staying high, and China’s growth is going into reverse
We are also far more indebted now
Informed challenge as ever. You might be right - certainly a lot of the data suggests that we are back in 2008/09. Worth noting that the Chch earthquake also effectively reduced our current account deficit by billions of dollars as re-insurance payouts flowed into the country.
I do wonder who is advising Govt on how perilous our position is - they should be making the case for targeted investment, but they're too busy competing on how much they can cut Govt spending by!
Thanks. The mind boggles in terms of your question. This government are so strategically inept. I have told the story many times of how I told government officials ( with M Woods looped in) about two years ago that a house building slump was coming, and was effectively laughed out of the room… apparently everything was going to be fine and dandy, they had an ‘amazing plan’.
So much group think and arrogance.
Despite its significant limitations, the MDRS might have had a real stimulatory effect, but it was designed and executed very poorly.
House Mouse - Do you think as interest rate increases bite/tax take decreases/unemployment-benefits increase that Govt and RBNZ will panic and reduce OCR to protect Banks from mortgage defaults? I understand that International Bank regulations require Banks to mark to market all impacted assets but unsure what % damaged assets need to be to trigger.
One notes - with the exception of Kiwibank who continue with their forthright appraisals - the Aussie banks are still talking up "Higher, for longer", or at least "for longer" narratives. Scoundrels. What won't they do to get people to fix long at rates that in 6-12 months are going to look very expensive?
And when the OCR does get cut, lets say May '24, they'll be keeping retail mortgage rates as high as possible for as long as possible to fatten their margins as funding costs fall away. [begin sarc] We can't have their profits fall or stagnate, can we? God forbid. [end sarc]
If someone fixes at the current rates they are protected should rates go even higher……and they can go allot higher. Yes the downside is that they pay more interest if rates drop, and could be exposed to break fees if they need to sell but for some people the risk is worth it. With the benefit of hindsight we will know what the right decision was.
Will be investors first... banks do not like a family on the street unless it's a totally lost cause that the mortgage cannot be extended and afforded. Many Investors will sell to other investors at lower cost, many rental houses have lost a lot of land value, and developers who can afford you build know they have the upper hand and can make very checky offers, to the mortgagee salesperson if required.
No amount of spruiking will be able to overcome the next 6 months..... Summer is not going to fire for real estate, instead a wall of pent up sellers will hit the market as soon as the mud dries up around Auckland. Construction must be sucking, there are about 3 times as many decent drop saws on trademe as there where about 3 months ago.
Its a great time for DIYers to pickup up decent tools, be careful nail guns that it doesnt need a serious service. this is a great deal if you have a bit of decking to do, I like this model as it does not double fire https://www.trademe.co.nz/a/marketplace/building-renovation/tools/airto… August house sales numbers will be out from barfoots soon......... more seem to be selling in the 1-1.2mil range this month.
Lets agree to chat in 6 months. There is no pent up wall of seller, listings where I am have dropped significantly. Its wait and watch until the day after the election results are in. Interest rates now look fixed for 1 to 2 years, there will be an uptick in property in the New Year.
You still seeing lots of new builds going up in Mt Roskill?
The net numbers of new public housing are poor and the private housing KO is facilitating is selling really poorly. Such as this one, where they are throwing every ‘sweetener’ under the sun to try and shift the homes:
Yes about 15% too high. But cut it 15% and they are probably hardly breaking even. But something they might have to do.
This sums up perfectly why housing development is slumping away big time. Realistically there’s no prospect of profit and every prospect of loss.
I'm surprised household spending has been so resilient, they've taking a kicking from all corners over the last few years. We have high inflation on one side and much higher tax levels caused by fiscal drag (i.e. not adjusting the income tax brackets for inflation) and increases in other areas like fuel taxation.
We now need a major economic rebalancing in favour of the working people if this country.
Not adjusting tax brackets should have meant the government then had more money coming in to spend on things like infrastructure. But that didn't occur. Now they are looking at new taxes to fund things. When NZ doesn't even have a CGT and the recommendations from the Tax working group were largely ignored. Such a waste of money.
It's one of the aspects of the Number 8 Wire mentality in NZ. Kiwis are real good at finding and exploiting loopholes or rorting the system.
It's why the zero GST on fresh fruit and veg will fail. It's why the most wealthy pay a lower effective tax rate. It's why any changes to try and balance things out for everyone end up needing so much time spent by consultants in working groups, only to have the findings thrown out as "too hard".
There's not a day goes by that there isn't a story about someone or another getting caught fiddling the books, and you can be sure there are a lot more that aren't caught.
Are New Zealanders basically dishonest, or is the system set up to reward dishonesty?
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