'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' - ASB economists

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."