Bernard Hickey: Consumers lead economy into age of austerity

Have New Zealanders really started saving and investing? Photo / Dean Purcell

The "new normal" is dawning on consumers and borrowers before it dawns on policymakers and the media.

Figures out this week show New Zealanders have begun the long and painful process of changing their ways and restructuring the economy.

Treasury and Reserve Bank statistics show New Zealanders are now injecting equity into their homes at a rate of about $3 billion a year, which is a huge turnaround from the equity withdrawal of more than $4 billion a year between 2004 and 2008.

Finance Minister Bill English trumpeted this as a sign New Zealanders were saving more and the economy had begun the long-awaited restructuring away from consumption and importing to saving and exporting.

But have New Zealanders really started saving and investing? If so, what might it mean for the economy?

The figures don't actually show increased saving. All they show is that people have stopped using their houses as ATMs. What is portrayed as increased saving is actually the difference between the amount that is being spent on new housing and renovations and the amount raised in new debt.

As a nation, we continue to spend more than we earn because we have a current account deficit. Until that is reversed, we are nowhere near saving again.

A closer look at what is happening with saving and borrowing show that New Zealanders have yet to start repaying debt and saving. Bank lending to housing has actually risen by $8 billion to $181.3 billion in the past two years. Lending to business has fallen $5 billion to $72.3 billion over the same period and lending to farmers has risen more than $6 billion to $47.8 billion.

This shows New Zealanders borrowed another $14 billion against the value of their land and property in the past two years. This doesn't show up as an equity withdrawal because the money was put into land and property rather than cars and boats. But it still doesn't lessen our reliance on property investing.

We need to be lending and investing more in businesses, particularly exporting businesses, to drive the transformation. That's not happening. The only part of the economy that is saving more and repaying debt is business.

But this is only the beginning. Household debt as a percentage of disposable income, which is a better measure of whether consumers are deleveraging, shows an improvement to 154 per cent from 158 per cent over the past two years. But New Zealand needs to get closer to the 100 per cent seen in 2000 to be anywhere near normal.

Retailers and bankers are beginning to sense the scale of what is coming. The housing market is deathly quiet this spring as first-home buyers refuse to add to their debts. Retail sales in August were flat, despite expectations of a pick-up before the GST hike. Retailers are being forced into permanent sales mode or are forced out of business. Bankers have even started pleading for people to borrow more.

Once New Zealanders really start saving, our bloated retail, consumption and importing sectors will feel much more pain. But this deleveraging is inevitable and can't be stopped. We are best off embracing this new age of austerity and the drive for balance in budgets, current account deficits and international trade flows. It means living simpler lives focused more on helping each other rather than trying to outspend each other.

Our Government should help us do this by balancing its own budget and encouraging production, exporting and saving. A good start would be a tax break on bank savings, increased capital requirements for bank lending on land, a higher core funding ratio to discourage foreign borrowing by our banks, local content requirements for government procurement, a land tax and a capital gains tax.

bernard.hickey@interest.co.nz