Hamilton, September 1, 2023
Spring might be just around the corner, but there is still a discernible chill in the air if last week’s economic data is anything to go by.
The ASB second quarter ‘Retail Trade Survey’ left little doubt that Kiwi households are rapidly clamping their wallets shut. Total retail volumes fell for the third consecutive quarter and are down 3.5% on year-ago levels. Core volumes (which exclude vehicles and fuel sales) contracted 5.1% on year-ago levels.
Consumers are cutting back
Buyers are holding up on discretionary spending as the cost of living takes its toll on budgets. Hospitality and durables spending volumes fell in the second quarter, translating into things like fewer meals out and fewer home upgrades.
“The fact that consumers are cutting back is not surprising and we have been warning for some time that 2023 would be a challenging year for consumers and by extension the retail sector,” said the ASB spokesperson.
“However, we have been slightly surprised by the extent of the pullback so far in 2023. Despite the headwinds (the high cost of living and rising mortgage interest rates), some tailwinds were 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. The implication is that a recovery in household expenditure in our view is unlikely to eventuate in 2023. The retail data also reinforces the suspicions that the New Zealand economy has remained in recession in the second quarter of 2023.
No victory on Inflation
At best, quarterly economic activity will switch between small positives and negatives over the remainder of 2023. In per capita terms, the economic downturn will be much more pronounced. Dampened consumer demand and slowing 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 in some pockets of the economy that will concern the Reserve Bank of New Zealand (RBNZ).
For now, the economic data is continuing to evolve largely in line with our forecasts. 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 from our forecasts). This week, the focus turns to confidence, for consumers and businesses. Both are likely to remain subdued. We expect businesses to report a subdued activity backdrop, with consumers reluctant to commit to major purchases. Weaker NZ demand will help to alleviate inflation pressures, but surveyed pricing metrics are expected to remain elevated. Election-related nerves/hesitancy could be weighing on the NZ economy, but we feel that the slowdown is largely a consequence of the extensive monetary tightening being delivered thus far.
Weak consumer sentiment
Consumer sentiment is expected to remain weak, with cautious consumers constraining economic activity. Households are likely to remain wary of committing to major purchases, given higher borrowing costs and other pressures on household budgets.
Cashflow pressures for households are expected to remain acute given persistently high inflation, like petrol prices rising more than 50 cents per litre since the end of June this year, and higher mortgage payments for those refixing mortgage rates. Household expectations could respond to brighter signs emerging from the housing market.
Praneeta Mahajan is an Indian Newslink reporter based in Hamilton.