Praneeta Mahajan
Hamilton, June 18, 2024
Recent data on card spending released by ASB Bank has once again underscored the financial struggles facing New Zealand consumers, highlighting a climate of economic caution as households grapple with widespread headwinds.
The report states, “New Zealand’s retail environment is very weak. Households are battling rising cost of living pressures, including higher mortgage interest rates, and have pulled back spending as a result.”
Current Economic Climate
Kim Mundy, Senior Economist at ASB Bank, elaborated: “Our take New Zealand’s retail environment is very weak. Households are battling rising cost of living pressures (including higher mortgage interest rates) and have pulled back spending as a result. More recently, the weakening in the labour market and rising unemployment rate has added to consumer caution. Indeed, consumer confidence has retreated again in recent months. With headwinds facing consumers unlikely to abate any time soon, we expect to see more of the same over the coming months.”
Ms Mundy said that Tax changes may not provide too much relief if cautious consumers opt to save a chunk. Weak consumer demand is a prerequisite to RBNZ rate cuts, but at this stage, it is proving slow to translate into sustained lower inflation. OCR cuts will remain a distant prospect until inflation cools further.
April Card Spending Figures
The latest figures from April painted a bleak picture for retail activity across New Zealand in May. Spending fell across all major categories, with particularly sharp declines in durables (-1.0%), apparel (-1.2%), hospitality (-2.0%), motor vehicles (-4.8%), and petrol (-2.8%). The only retail component that saw a slight increase was consumables (0.1%), thanks largely to population growth and higher food prices. However, even in this category, annual growth is modest at just 1.9%.
Spending on services (-5.8%) and non-retail items (-0.7%) also showed significant declines, further illustrating the overall cautious spending behaviour of consumers.
Consumer Caution and Economic Outlook
Consumers’ reluctance to spend is evident not just in monthly figures, but also in long-term trends. Retail spending levels are now at their lowest since mid-2022 and are 4% below the nominal highs of 2023. When adjusted for population growth, the per-capita figures are even more concerning.
The underlying trend of weak card spending is expected to continue as households brace for further economic challenges. Key headwinds include elevated living costs (with household expenses rising by an estimated $70 per week), a cooling labour market (with unemployment projected to exceed 5% by year-end), and a sluggish housing market. Although upcoming tax cuts may offer some relief, it is anticipated that cautious consumers will save a significant portion of any additional income.
Implications for Monetary Policy
High interest rates are already weighing heavily on consumer spending, which is a deliberate strategy by the Reserve Bank of New Zealand (RBNZ) to curb inflation. However, despite the current retail recession, the RBNZ will need to see more substantial evidence of sustained lower inflation before considering any cuts to the Official Cash Rate (OCR).
The RBNZ remains focused on achieving an inflation rate below 3%. Given the persistent economic headwinds, it is likely that OCR cuts will remain off the table until there is clear, consistent evidence of inflation cooling further.
Praneeta Mahajan is an Indian Newslink reporter based in Hamilton.
