Spending on nice to haves rapidly shutting down
There is still a discernible economic chill in the air as Kiwis clamp shut their wallets and cut discretionary spending, Kim Mundy, ASB senior economist says.
Thursday, August 31st 2023, 9:34AM
by Sally Lindsay
In ASB’s latest Economic Weekly, Mundy says the bank has been slightly surprised by the extent of the pullback and recovery in household expenditure is unlikely to eventuate this year.
Last week’s second quarter NZ Retail Trade Survey left little doubt that Kiwi households are reducing spending.
Total retail volumes fell for the third consecutive quarter and are down 3.5% on one year ago. Core volumes – which exclude vehicles and fuel sales – contracted 5.1% on year-ago levels.
Consumers are cutting back on the nice-to-haves, such as meals out and home upgrades. “The fact consumers are cutting back is not surprising, as we’ve been warning for some time that this would be a challenging year for consumers and by extension the retail sector,” Mundy says.
Despite the headwinds – the high cost of living and rising mortgage interest rates – there were also some tailwinds in the first half of the year.
Households were collectively still sitting on about $30 billion of savings accrued during Covid, wages were rising at a historically fast pace and more recently high immigration has been boosting the population – and by extension, demand.
However, those tailwinds are fading while the headwinds remain in play, she says.
“The retail data also reinforce our suspicions the New Zealand economy remained in recession in the second quarter of this year. At best, we see quarterly economic activity flitting between small positives and negatives over the remainder of this year. In per capita terms the economic downturn will be much more pronounced.”
Dampened consumer demand and slowing/falling economic growth are necessary but not sufficient conditions for the RBNZ to declare victory on inflation, Mundy says.
Falling 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.”
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 ASB’s forecasts.
Consumer and business confidence remains subdued, with consumers reluctant to commit to major purchases. Weaker demand will help to alleviate inflation pressures, although election-related nerves/hesitancy could be weighing on the economy, but the bank feels the slowdown is largely a consequence of the extensive monetary tightening being delivered.
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