Praneeta Mahajan
Hamilton, July 9, 2024
The household sector, a crucial part of the economy, is facing tough times. With recent headwinds dampening the mood, the rest of 2024 looks challenging. However, these difficulties are setting the stage for more stable growth in the future.
According to Mark Smith, Senior Economist at ASB Bank, “The struggles we are seeing now are a result of the artificial boost in spending and housing during 2021. This post Covid-19 adjustment is necessary for long-term stability.”
Post Covid-19 Adjustment
According to a report released by ASB Bank, the current economic struggles are largely due to the aftereffects of factors that artificially inflated household spending and boosted the housing market in 2021. Covid-19 related border closures limited overseas spending, creating a tight labour market.
Falling interest rates led to increased spending, causing a 45% surge in house prices from late 2019 to the end of 2021. However, the music had to stop sometime, and we are now amidst a post Covid-19 adjustment.
Higher interest rates have cooled the housing market and household spending. House prices are now more than 20% below their late 2021 peak when adjusted for inflation.
Saving buffers
The report states that “Household saving buffers have been progressively run down as families struggle to stay afloat. Household spending volumes are 5% off their peaks on a per-capita basis and look set to fall further over 2024. Durable spending has seen much larger per-capita falls.”
The household sector has gone into hibernation, and consumers remain extremely cautious and are unwilling to extend themselves financially.
Cost increases facing households are waning, but the sources of pressures are rotating. Firms, anticipating a lift in demand, have held onto labour but are now reassessing hiring plans as economic prospects sour and profitability pressures grow.
Key Economic Drivers
The report details three key metrics shaping the outlook for the household sector.
Cost of Living
Cost of living pressures are cooling overall but remain significant in some areas, according to the report. High interest rates have provided cash windfalls for savers but have increased pressure on borrowers. Mr Smith notes, “New Zealand’s inflation is cooling, with CPI inflation expected to fall below 3% by the end of 2024, easing some cost pressures.”
Household Wealth
As per the report, household wealth was about $2.3 trillion at the end of 2023, equivalent to roughly $1.2 million per household.
However, this wealth is unevenly distributed, with housing constituting more than half of total household wealth. Household debt is around $300 billion, with modest deleveraging since Covid-19.
Despite several positive factors, the housing market has not picked up in 2024. Affordability remains an issue, and many who bought at the peak may now face negative equity, states the report.
Employment and Labour Incomes
The report also highlights how the labour market is slowing, with rising unemployment and peaking wage growth. Corporate profitability, crucial for sustaining wages and employment, is at its lowest share of GDP in 25 years.
Mr Smith said, “Declining profitability could deter investment, leading to slower growth and lower household incomes. Firms may need to cut costs, including hiring and investment, to rebuild profitability.”
Looking Ahead
The household sector is recovering from the Covid-19 related excesses, but short-term pain remains. We expect households to remain cautious for the rest of the year, with unemployment potentially hitting 6% by mid-2025. However, a retrenching household sector will allow other parts of the economy to grow without adding inflation pressure.
Mr Smith predicts, “We are increasingly confident that core inflation will settle below 3%. This could lead to OCR cuts by the end of 2024, which should support consumer sentiment and spending.”
“Overall, while 2024 may be tough, signs are brighter for 2025. Households are likely to make more informed decisions, leading to a more durable recovery in spending and the housing market. The recovery in 2025 will not be as dramatic as the 2021 surge but should be more sustainable in the long run.”
Praneeta Mahajan is an Indian Newslink reporter based in Hamilton.
