In the year to June, retail spending levels increased by around 3 percent (excluding the impact of price changes). While that’s not slow, it is a noticeable stepdown from the rates of 5 to 6 percent annual growth that we saw in recent years.
Spending growth is expected to hold up through the second half of the year, boosted by increases in transfer payments to households. That includes around $1.5b of spending on the Government’s families package and accommodation support payments, which will provide a significant boost to the disposable incomes of many households. However, that will provide only a temporary fillip.
Looking at the household sector more broadly, a period of softer spending growth is on the cards as we head into 2019. Much of the strength in spending in recent years was supported by high levels of net migration. That saw population growth surging to just over 2 percent per annum, providing a sizeable boost to our demand base. But while migration remains elevated, the net flow of people into the country has been declining. In fact, figures for the year to July showed that the net inflow of people into the country has slowed to its lowest level since 2015.
We expect that net migration will continue to slow as many of those who arrived in recent years on temporary visas depart. Improving job prospects in other regions are also making New Zealand relatively less attractive as a destination. Together, these developments will see net migration continuing to decline and population growth slowing to around 1 percent in 2022, signalling a huge reduction in what has been an ‘easy’ source of sales growth for many businesses.
Spending growth will also be dampened by the slowdown in the housing market, which comes against a backdrop of significant policy changes targeting housing affordability and supply. These changes have seen nationwide house prices remain broadly flat since February. That’s a significant slowdown from previous years when prices were rising at double-digit rates. There’s been particular softness in Auckland and Canterbury where prices have been falling modestly in recent months. Prices are still rising in other areas, but at a more gradual pace than in previous years.
We expect that policy changes will result in modest house price declines over the next few years. Recent falls in mortgage rates, and a likely easing in the Reserve Bank’s loan-to-value restrictions in January, will provide some counterbalance to the changes in the policy backdrop. Nevertheless, we are still looking at a subdued outlook for house prices over the next few years.
New Zealand households hold a large proportion of their wealth in both owner-occupied and investment housing. Consequently, the softness in house prices is likely to be a significant drag on spending, especially for items like household furnishings, which tend to be closely linked to house sales.
Satish Ranchhod, senior economist at Westpac