Westpac’s senior economist, Satish Ranchhod, talks about how consumer spending is set to continue growing at a firm pace over the coming year.
The New Zealand economy is now into its seventh year of continued expansion, and most indicators point to ongoing firmness in household spending over the coming year. Activity has long been supported by strong population growth, increases in construction spending, and accommodative monetary policy. On top of those factors, we’re now also seeing firmer conditions in exports sectors, and fiscal policy is set to adopt a more stimulatory stance.
But while overall economic conditions have been firm, New Zealand is still wrestling with some big challenges. On a per capita basis, economic growth has actually been quite modest. In addition, much of the increase in domestic demand in recent years has come on the back of rising household debt, which is not a sustainable source of growth. The economy is also facing ongoing issues in relation to the provision of housing and infrastructure, which have been compounded by growing headwinds in the construction sector.
Reinforcing the above challenges have been some important changes in the economic landscape. Most notably, borrowing rates have crept higher over the past year, and the housing market has slowed. Nationwide house price growth has slowed to just 1 percent over the past year. That’s a far cry from the double-digit rates of house price growth we saw over the past few years. We’ve also seen the number of house sales fall 25 percent over the past year, and the number of unsold homes has been creeping higher. This suggests that there is more housing market weakness to come.
The slowdown in the housing market has been sharpest in Auckland, where prices have fallen 4 percent since January. That follows very large gains in recent years that eroded housing affordability and left house prices in our largest city significantly overvalued on a number of metrics. Housing markets have also slowed in other parts of the country, but to a lesser degree.
New Zealanders hold a large proportion of their wealth in housing assets, and the combination of low borrowing rates and rising house prices in recent years gave household spending a powerful shot in the arm. But now, with momentum in the housing market fading and interest rates higher, a period of softer in household spending is on the cards.
Combined with an eventual slowdown in the migration cycle, this will see the current period of firm economic activity give way to a period sluggish GDP growth before the close of the decade.
As GDP growth slows, some of the other challenges that the economy has been wrestling with will become even more pressing. In particular, the run up in household debt in recent years poses downside risk for domestic demand. New Zealand households are now carrying $264 billion of debt, a level that’s up 30 percent up since 2012. These high levels of household debt will be a brake on spending growth over the coming years. Debt eventually needs to be repaid, and the large increases in recent years mean that households will now have to commit a greater proportion of their future income to debt repayment.
The good news for retailers and households is that monetary policy is likely to remain very accommodative for some time. Inflation currently sitting at levels below the Reserve Bank’s 2 percent target mid-point. The Reserve Bank needs a period of strong economic activity to fully ward off the low inflation that has dogged it in recent years. And that requires support from low interest rates. We’re not forecasting any change in the Official Cash Rate until late-2019. And even when the OCR does start to rise, we expect it to be at a gradual pace.