Weekly Economic Commentary 26 June 2023
Analysis and forecasts of the economy and markets, along with previews of data for the week ahead.
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Household finances still in the vice.
The mood among New Zealand households has remained gloomy in the face of mounting financial pressures. That ongoing pessimism reinforces our expectations for subdued household spending and economic growth over the months ahead.
While our Westpac McDermott Miller Consumer Confidence Index did rise 5.4 points in June, it currently sits at just 83.1. That’s well below average and signals that the number of households who are feeling pessimistic about the economic landscape outweighs those who are optimistic by a wide margin. Consumer confidence has been lingering at extremely low levels for more than a year now, with confidence weak across all regions, age groups and income brackets.
This downbeat assessment of economic conditions is despite New Zealand’s strong labour market. Unemployment is currently just 3.4% and disposable incomes have risen by 6.5% over the past year.
But even as earnings have pushed higher, the majority of households are reporting that their finances are being squeezed. In fact 43% of the households we spoke to in June told us that their financial position had deteriorated over the past year, while just 14% had seen an improvement.
That pressure on household finances is coming on two big fronts. First, living costs have been charging higher, with consumer prices up 6.7% over the past year. Notably, a big chunk of that increase has been due to increases in the costs of necessities – housing and utility costs were up 7% in the year to March and food prices were up an eye watering 12% in the year to May. Those cost increases are hitting every family in the country in the pocket. They have been especially tough on those families who are on lower incomes, who tend to spend a larger share of their income on necessities.
The other big factor squeezing many households’ finances has been the rise in mortgage rates. Interest rates have been on the rise for well over a year now. However, with around 90% of New Zealand mortgages on fixed rates, many borrowers were insulated from those increases for a period. But that picture has now changed. Large numbers of mortgages have now rolled on to higher interest rates. In fact, accounting for the extent of interest rate fixing, we estimate that the average ‘effective’ mortgage rate that New Zealand borrowers are actually paying has increased by around 120 bps since early 2022.
And there’s more pain to come on this front. Around 50% of all fixed rate mortgages will come up for repricing over the year ahead, and the average mortgage rate is set to rise by a further 150 bps by early 2024. That will see the average household’s spending on interest costs increasing from around 5% of their disposable income in 2022 to 10% in 2024, and some borrowers will face much larger increases.
In the face of these powerful financial headwinds, overall spending levels in the economy have actually remained firm in recent months. However, that apparent resilience in the headline spending figures masks a much softer picture beneath the surface. Although nominal spending levels have been pushing higher, those gains are entirely due to the impact of price increases. The amount of goods that households have actually been taking home has been trending down for the past year.
Crucially, with financial headwinds continuing to mount, households are likely to continue to rein in their spending over the coming months. In fact, we expect that per capita household spending will fall by around 2% over 2023 and 2024 combined. Household spending accounts for around 60% of overall economic activity, and the retrenchment that is already in train will be a significant drag on economic growth.
But while there’s no denying that many households are grappling with some big challenges, consumer confidence has actually picked up a bit from the record lows we saw at the end of last year. And looking ahead, there’s reason to think that we could see a further rise over the coming months with some big shifts in the economic landscape already in train. Notably, the interest rate cycle is looking close to a peak. Consistent with that, we’re already seeing signs that the housing market is finding a base, with both house sales and prices rising over the past few months. In addition, the high rates of inflation that have been eating away at households’ spending power have started to moderate, and a further easing is on the cards over the coming year.
Furthermore, while mounting financial pressures will be tough for many households, the slowdown still looks like it will be manageable for the economy as a whole. On average, New Zealand households are entering the current downturn with their finances in good shape. In addition to a strong labour market, savings rates have picked up in recent years. At the same time, many households have taken advantage of the low interest rates in recent years to get ahead on their mortgage payments. And while interest costs are pushing higher, that’s been a rise from extraordinarily low levels – mortgage rates are currently sitting around the averages we saw through the past decade.
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