The average one-year mortgage rate is currently 7.23%. Photo / Getty Images
Hi and welcome to my new mid-week column. Every week, I’ll answer reader questions about the economic forces shaping our world and take a deeper dive into some of the more left-field economic news you may have missed.
If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz ... or leave a message in the comment section.
Q: My mortgage has doubled and my wife has had to go back to work. I just wonder where all the extra money we give to the bank goes. I hope whoever gets it finds it useful. Maybe they could ring my wife and thank her. - Jeremy W.
A: Wow, that sounds like a painful adjustment, alright. Sadly, it’s one that many Kiwis are grappling with as interest rates have sky-rocketed from record lows to levels we haven’t experienced for about 15 years. The short answer to your question is most of your extra outgoing money is going to savers in the form of the higher interest rates banks now have to offer on deposit accounts.
Like a lot of things in economics, there are two sides to the interest rate equation (that should theoretically balance out). In other words, the banks shouldn’t be making more money off a higher Official Cash Rate. It’s easy to be a bit sceptical about that. Reserve Bank data shows net interest margins did creep up as rates rose through 2022 until about mid-2023. They have plateaued now. Intuitively, it always feels as if the bank deposits are a bit slower to rise than mortgage rates after an OCR hike.
For the record, the RBNZ makes the point that higher interest rates slow the economy through several channels and cash flow is just one of them. Others include:
Q: It’s my firm belief the high cost of housing in NZ is the principal cause of economic angst in the community. The main problem facing our economy is: How do we reduce building costs? In particular housing costs? - Alexander M
A: This is a big one alright. I’m not sure it’s the biggest problem, but it’s definitely in my top five. It’s also something that years of debate have failed to resolve. There seems to be universal political agreement that building products are too expensive here compared to Australia or Asia (In fact, you could swap building products out for groceries, petrol or any number of professional services).
Is it the tyranny of distance or a lack of market competition that is to blame? I reckon a bit of both. When it comes to competition, New Zealand is always up against it because of our low population base. It’s risky for third or fourth-tier competitors to enter the market. On that basis, it makes it more crucial for us to have our markets structured and regulated most efficiently. Unfortunately, we haven’t been great at that either. Should we regulate more - putting pressure on monopolies and encouraging new entrants? Or do we have too much regulation? I’d be genuinely interested in any solutions readers have. Maybe we can get some momentum going for change!
The Monetary Policy Statement and OCR call (on hold) hogged the economic headlines last week but there’s been no shortage of what economists like to call “second-tier data”...
Major banks drop rates
ANZ and ASB both dropped their mortgage rates on Monday as markets priced in a slightly more dovish outlook from the Reserve Bank. But, as a mortgage holder, I’m not counting on any material change in the next six months or so. The adjustments this week were pretty marginal and (hopefully) the result of a bit of competition hotting up in the banking sector as they prepare for the next cycle. The reality is that the RBNZ hasn’t forecast a cut to the OCR until well into 2025. Even optimistic local economists are picking November. I was feeling pretty gloomy about it all in my column on Sunday, with one upbeat proviso. I think the world will be battling deflation again soon enough - driven by an ageing population and AI technology.
Falling behind
Ominously, with little sign of serious rate relief on the horizon, the number of Kiwis behind on their mortgage repayments rose to more than 21,800 in January, up 16 per cent year-on-year, Centrix’s latest Credit Indicator report shows.
That is actually quite low by historic standards. We still aren’t back to pre-Covid levels - mortgage arrears were at 1.49 per cent in March 2020. But the acceleration is extreme and, the way monetary policy works, particularly with many people rolling off two-year fixed mortgages, means we look headed for much higher numbers in the months ahead.
Meanwhile, consumer arrears rose to a seven-year high in January, with 13.09 per cent of accounts behind on repayments. This was up 9.6 per cent year-on-year, and the highest level of arrears reported since February 2017. These numbers are important to watch because - along with unemployment - they represent the number of people really struggling to survive financially. If we want to claim a “soft-landing” out of the pandemic comedown then they’ll need to stay well below levels we saw after the GFC.
Good time to buy?
Is it a good time to buy a major household item? It’s a staple of consumer confidence surveys, although it always strikes me as a bit of an odd question. I am mostly inclined to buy a new appliance when the old one breaks. I’m not sure who waits for an economic rebound to buy a new fridge. But I guess it’s one of those things where it makes sense, at a macro-level, when you look at the aggregate of a large number of responses. Consumer confidence rose in February according to the latest ANZ-Roy Morgan survey - but not by much. And it is still looking pretty grim for retailers. A net 18 per cent think it’s a bad time to buy a major household item, still low, but well off its July - 2023 low of 39 per cent.
Trading down
New Zealand managed to narrow its trade deficit in the December quarter from $8.1 billion to $4.6 billion. Good effort. Unfortunately, the reduction was less of an improvement than economists and markets had expected.
Also, a more worrying feature of the trade data was “the plunge in the merchandise terms of trade”, BNZ senior economist Doug Steel said. It fell 7.8 per cent in the quarter to be down 10.6 per cent over the year. “A lower terms of trade means a decline in the country’s purchasing power – a feeling no doubt many have felt of late. Lower purchasing power usually shows up in things such as lower retail sales, weaker consumption, and or investment.”
Services exports - which, in New Zealand, mostly means tourist spending - took the edge off a bit as it continued to improve.
New Zealand’s services trade deficit narrowed to $696 million in the December 2023 quarter, compared with $2.1 billion in the December 2022 quarter, Stats NZ optimistically emphasised at the top of its press release.
“Export travel services were some 44 per cent higher than a year earlier, " Steel noted. “But, as we have been highlighting, tourism’s rebound looks to have run out of puff over the later part of last year.”
Tourism to the rescue
As BNZ’s Steel suggests the rebound for the tourism industry has slowed, although new data shows it came back pretty strong as the borders reopened.
Figures released last week on tourist spending to March 2023 - show a strong recovery in spending by domestic and international visitors to $37 billion. That was still $4b short of the pre-pandemic high of 2019.
International visitors spent $17.6b in the year before borders closed and the new Stats NZ figures for the March 2023 year showed this had recovered to $10.8b, putting tourism back in as tourism as the second biggest foreign exchange earner after dairy.
Knocking dairy from its number-one spot - which has happened a few times over the years - looks unlikely until we see a turnaround in Chinese consumer sentiment.
Last year was the fifth worst for world trade since 1950, this stark new graphic from global consultancy Capital Economics shows.
There are a lot of reasons why New Zealand’s economy is in the doldrums right now, but given how reliant the country is on trade this has to be a contributing factor.
Shrinkflation or Skimpflation
The New York Times has taken a fascinating deep dive into the phenomenon of “shrinkflation” - basically when companies drop the size or weight of popular products without dropping the price.
Is it a sneaky variation of inflation that gets missed in the official statistics?
Well, the Times notes that - in the US at least - shrinkflation does get measured but something called “skimpflation does not.
So...
“If your paper towel roll costs the same but you’re getting fewer sheets — shrinkflation — that shows up clearly as a unit cost increase that is added to official inflation. If your paper towels are the same size but are suddenly made of worse material — skimpflation — the Government does not record that as inflation,” the NY Times says,
I’m curious about how it works with New Zealand Consumer Price Index inflation and will check with Stats NZ and report back.
Meanwhile, I reckon the most egregious local example of shrinkflation is the state of the Mars and Snickers Bar these days. They are down to two bites worth, not much more than the old “fun size” that comes in a multi-pack. Not much fun at all.
If you have seen other examples of shrinkflation or skimpflation, let me know.
“Well. We couldn’t have gotten that one more wrong,” ANZ chief economist Sharon Zollner front foots it after the RBNZ leaves rates on hold.
But she doesn’t mean she’s backed down from her view, that more hikes are needed...
“The RBNZ has its view, and we have ours, and our basic economic view is unchanged: with the OCR where it is, we think there’s a good chance inflation is not going to return to target in an acceptable time frame.”
Expectations tempered around return to surplus in 2027/28.