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A temporary slowdown

Westpac senior economist Satish Ranchhod discusses how household spending growth has slowed in early 2019. 

Household spending growth has slowed through the first half of 2019. We estimate that nominal spending levels only increased by around 1.5 percent in the six months to June. That’s not much more than the rate of population growth. 

Two big factors have been dampening spending appetites in recent months. The first is high petrol prices, which have siphoned funds out of households’ wallets and crimped spending in other areas.

The second factor weighing on spending has been the softness in the housing market. House sales have fallen to low levels in many regions, and on a nationwide basis house price inflation has slowed to just 2 percent. New Zealand households hold the bulk of their wealth in housing assets, so it’s not surprising that softness in the housing market has dampened spending appetites. We’ve seen this most clearly in spending on household durable items like furnishings, which has essentially been flat since November.

This muted household spending growth comes atop other signs that the New Zealand economy has lost some momentum. That includes softness in the business sector, with many businesses winding back plans for investment spending in the face of muted demand growth, rising costs and strong competitive pressures. 

But while the economy is facing some headwinds, we actually expect to see economic activity firming through the back half of 2019 and into 2020. That’s due to large increases in fiscal spending that are being rolled out, as well as the very low level of interest rates. Together, those factors are likely to provide a powerful boost to demand in many corners of the economy. Their impact will be seen particularly clearly in the housing market, especially as the proposed capital gains tax has now been scrapped. We expect nationwide house price inflation will reaccelerate to around 7 percent over the coming year, and that there will be a related lift in household spending growth. 

But while overall economic conditions are expected to firm, we still expect to see some notable regional differences. At the head of the pack, we expect to see continued strength in demand in the central and lower North Island, supported by increases in agricultural export incomes, strong house price growth and continued population gains. 

Spending appetites are also likely to remain buoyant in Wellington, supported by the expansion of the public sector. 

Spending in Auckland is expected to continue growing at a reasonable pace. However, much of this is due to increases in the population. While net migration has slowed, population growth in Auckland continues to outpace the rest of the country, and that is boosting spending in areas like retail and hospitality. House price inflation in Auckland is expected to pick up over the coming year, but more modestly than in other regions, with policy changes targeting investors continuing to limit gains. 

Spending growth in Canterbury remains a bit more moderate than in other parts of the country. The region’s economy continues its transition away from construction-led growth. That’s putting a dampener on growth more generally. 

Spending growth in other parts of the South Island has eased off a bit over the past year, but remains firm. Incomes in many regional centres have been boosted by increases in commodity prices. Some parts of the South Island have also had strong house price gains.

This story originally appeared in NZ Retail issue 763 August / September 2019.

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