Cautious spending predicted; businesses need to plan ahead: ASB
Christmas spending by Kiwis is likely to be “a little more cautious” compared with the previous two years, says ASB chief economist Nick Tuffley.
Households are facing a number of pressures, he says: “It feels like the cost of everything is going up.” Inflation has hit 7 per cent and mortgage rates are rising rapidly.
“Those of us with a mortgage are starting to increasingly feel the impacts of rising interest rates. That will impact on the amount of discretionary spending power we have.
“There are some positives. Incomes are starting to rise quite sharply through the benefits of inflation and labour shortages. We also have to remember that job security is very good at the moment, with the unemployment rate at a three-decade low,” says Tuffley.
Consultant PwC, in its holiday outlook report, say consumers plan to spend an average of $1430 on gifts, travel and entertainment this season – only slightly down from the $1447 they spent last year.
The pressure on spending and economic activity was heightened when the Reserve Bank hiked the official cash rate (OCR) 75 basis points to a 14-year high of 4.25 per cent. The bank said demand has remained resilient, household spending is elevated, labour markets are tight, wages are rising, global prices for New Zealand’s commodities are high, tourism is recovering strongly, supply bottlenecks have been problematic, and inflation expectations have been rising. It required even more aggressive monetary policy action.
In its Economic Note on the Reserve Bank’s November monetary policy statement, ASB said from a strong activity starting point, the bank is forecasting a recession next year. Its focus is very much on getting inflation under control after being surprised by how resilient the economy has been to date.
The Reserve Bank has made an explicit trade-off of reducing demand in order to tame inflation quickly, to reduce the chance of high inflation changing people’s behaviour in ways that make the RBNZ’s job even harder and exert an even bigger cost on the economy.
ASB expects the Reserve Bank to hike the OCR by 75 basis points in February and 50 basis points in April to a peak of 5.5 per cent.
These moves will push interest rates higher; mortgage rates will head to around 7 per cent. This is on the back of the biggest annual rise in food prices since 2008, with a 10.1 per cent increase for the year ending October. Grocery items and fruit and vegetables were the two main drivers for the increased food inflation.
Wage inflation, measured by the Stats NZ labour cost index, was 3.8 per cent in the year ending June – the largest increase since records began in the early 1900s. Average ordinary time hourly earnings rose 7.5 per cent. The unemployment rate remained low at 3.3 per cent.
National house prices have fallen for 11 consecutive months and, based on REINZ indices, are 12 per cent below the peak of November last year – but still 24 per cent ahead of pre-pandemic times.
ASB expects the housing market to pick up again from mid-next year once the Reserve Bank has stopped increasing the OCR and net migration numbers are starting to trend up. Before then, house prices could fall as much as 20 per cent.
It will be a challenging end of the year for businesses which will feel the pinch when discretionary spending is reassessed.
Tuffley says, like everybody, businesses are dealing with rising costs and they need to work through how they respond: “Labour shortages and rising wage costs are going to be around for some time and businesses need to ask themselves: What efficiencies can they make? To what extent can they pass costs on to their customers or will their margins come under pressure?”
Business owners are continuously dealing with uncertainty at the moment, he says, yet they need to keep planning for the future. Focusing on long-term plans for dealing with labour shortages and cost pressures would be really helpful.
“We do see that future population growth – and the number of people available to work – is likely to be much slower than we’ve been used to.”
“When we are talking about attracting people, what will be really important is the work conditions you are able to offer employees, whether encouraging them to stay with you or come to you. What sort of on-the-job training can you offer? Flexibility? There are a whole variety of things to make the employee experience much better and attractive.”
Tuffley cites one example of employers helping their workers find somewhere to live and overcoming a fairly tight and costly housing market. In provincial New Zealand, wages may not be as high but living costs are still up there; providing accommodation is one way of encouraging people to move and work in a particular business.
He says one challenge for many businesses and households has been the cost of fuel: “Fortunately, we are seeing it generally come down, though diesel prices are still high. We need to be aware that transportation costs have been elevated and will likely remain fairly high.”
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