Editorial: The medicine is working but it’s a bitter pill to swallow for some

Household spending is still falling as belt-tightening continues. Photo / Richard Robinson

EDITORIAL

Retail spending figures out this week show households are feeling the bite and have pulled back sharply on discretionary spending.

Food and beverage spending and hardware and garden supplies were the two categories with the biggest drop outside of fuel retailing, which largely fell as fuel prices headed down.

The price of petrol has since gone back up so that number is bouncing around, but the trend is clear with three quarters in a row now showing spending in decline.

Retail spending has now fallen to its lowest level in four years on a per capita basis outside of the pandemic, when people couldn’t spend due to lockdowns.

That will be good news for the Reserve Bank, which has sharply hiked the Official Cash Rate (OCR) in a bid to control inflation and slow the economy.

But it’s a bitter pill for retailers, restaurants and cafes to swallow. Those industries did it tough under Covid-19 restrictions, and many are only now getting back on their feet.

Some cannot keep going. This week, well-known sandwich shop Wishbone went into liquidation, blaming the rise on more people working from home post-Covid and inflation-related pressures.

Earlier this month, Epic Brewing Company also folded as a result of rising prices, the pandemic, and the recession.

Forecasts from last week’s Monetary Policy Statement now show the OCR staying high for longer, with cuts now not pencilled in until 2025.

Borrowers holding on for any relief on the mortgage front are likely to be waiting another six to nine months for rates to come down and even further, depending on how long they have fixed their mortgage.

The squeeze on borrowers is particularly acute for those in their 30s and 40s who have the largest mortgages.

This younger demographic is also typically the biggest-spending group in the economy, while older people are net savers.

While younger people are hunkering down paying high mortgages, older New Zealanders who have paid down their debt are also now benefitting from higher interest on savings in the bank. They are able to keep spending.

Many are off travelling again but that doesn’t help local businesses. That’s likely to mean more small businesses feeling the pressure, and more will be forced to shut up shop.

ASB economists predicted this week that the economy will remain flat over the next year, with another dip into recession at the end of this year.

They say strong immigration is masking the pain people are feeling. High employment has so far sheltered people from the really bad outcome of being forced to sell their home, but there are signs that the employment market is on the turn as well.

The true test in the coming months will be whether businesses keep staff on or look to reduce their headcounts. A tight labour market and difficulty getting staff have been features for so long but have become much less of an issue in recent months.

Kiwis look like they will be toughing it out for some time yet.