A more pronounced economic downturn tipped over the rest of 2023
Kiwi households are rapidly clamping their wallets shut and it is unlikely that household expenditure will recover this year, according to ASB economists.
In ASB’s latest publication, titled There’s a chill in the air, Kim Mundy (pictured above), ASB chief economist, said the latest retail data “reinforce our suspicions that the New Zealand economy remained in recession” in the second quarter.
The Q2 NZ Retail Trade Survey showed total retail volumes falling for the third consecutive quarter - down 3.5% compared to the prior year. Core volumes (which exclude vehicles and fuel sales) were down by 5.1% on year-ago levels.
Discretionary spending, also known as the nice-to-haves, contracted. Spending volumes on hospitality and durables fell in Q2 2023, which translates to fewer meals out and less home upgrades.
“The fact that consumers are cutting back is not surprising and we’ve been warning for some time that 2023 would be a challenging year for consumers and by extension the retail sector,” Mundy said.
“However, we have been slightly surprised by the extent of the pullback so far in 2023. Despite the headwinds (the high cost-of-living and rising mortgage interest rates), there were also some tailwinds floating around in the first half of the year.”
These tailwinds, ASB said, included some $30 billion of savings accumulated by Kiwi households during COVID, nominal wages rising at a historically fast pace, and high net immigration that has been boosting the population, and by extension, demand. These tailwinds, however, are fading, the economists said, while the headwinds remain very much in play.
“The implication is that a recovery in household expenditure in our view is unlikely to eventuate in 2023,” Mundy said. “At best, we see quarterly economic activity flitting between small positives and negatives over the remainder of 2023. In per-capita terms, the economic downturn will be much more pronounced.”
For RBNZ to declare victory on inflation, it was necessary but not sufficient for consumer demand to dampen and economic growth to slow/fall. While less demand will help bring down inflation over time, inflation continues to be sticky in some packets of the economy, which the central bank will find concerning.
“It’s unlikely to be until weak demand feeds through into materially lower wage and price growth that the RBNZ will feel its mission is accomplished,” Mundy said.
“For now, the NZ economic data is continuing to evolve largely in line with our forecasts. And we think that’s consistent with the current OCR (5.50%) being the peak in this cycle. But the RBNZ’s desire to make sure inflation is well and truly back in its box suggests OCR cuts are a long way off (about 12 months away within our forecasts).”
Read the full ASB Economic Weekly report.
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