'Astounding' rise in household spending will put further pressure on the Reserve Bank to lift interest rates - economist
Monday, 12 July 2021
Astoundingly strong retail spending will add pressure for the Reserve Bank to ease off on economic stimulus sooner than previously forecast, Westpac economists say.
Satish Ranchhod, senior economist at Westpac, said the bank expected the Reserve Bank to raise the Official Cash Rate in November.
“Retail spending rose by 0.9 per cent in June. That was stronger than the 0.2 per cent gain we expected,” Ranchhod said.
The two standout categories of household spending were on household durables like washing machines, furniture and TVs, and hospitality.
**READ MORE:
* Home-building hits high gear with a record number of consents issued in the last year
* Petrol price drops 12 per cent in June quarter, NZ inflation falls 0.5%
* Economic snapshot: Will the faster than expected recovery be snuffed out?
**
Ranchhod expected the Reserve Bank to use its Wednesday monetary policy review to signal it would be easing economic stimulus sooner than it had previously expected.
“We expect this week’s announcement will see a shift in the Reserve Bank's policy outlook, with the central bank to set the stage for earlier interest rate increases than had previously been expected,” he said.
Kiwibank economist Mary Jo Vergara said hospitality spending was partly the result of people holidaying at home as they were prevented from going overseas.
“Staycations are helping to keep pockets of the tourism sector running,” Vergana said.
“There's always a new trail to hike, beach to surf or town to visit. Spend on hotels and accommodation remains elevated. And the upcoming school holidays and ski season should provide another boost. Last winter’s ski season was strong, with Kiwi embracing the cold, rather than summers offshore.”
Ranchhod said the jump in retail spending this year had been “astounding”.
“June’s increase adds to the picture of strong demand through the middle part of the year. In fact, looking at the June quarter as a whole, retail spending levels are up a stonking 5.7 per cent.”
Factors that were contributing to the spending boom could include the “wealth effect” of rising house prices making homeowners feel rich, Ranchhod said.
In addition, people were getting low interest rates on money in the bank.
Not all of the leap in spending was households willingly loosening the purse strings.
Instead, it could have been the result of shortages of imported goods leading to people having to pay higher prices for the things they wanted, or needed.
“Some of the recent strength in spending levels may be related to price increases, rather than an increase in the quantity of goods being sold,” Ranchhod said.
“Recent months have seen widespread reports of shortages of goods and upwards pressure on both production costs and output prices.
“But even if some of the strength in spending is a result of price rises, we’re still left with a picture of strong underlying demand that is allowing retailers to pass on cost increases.”
Vergara said total Kiwibank credit and debit card spending rose 7.2 per cent in the June quarter.
“Kiwibank’s transactional data suggests that domestic demand remains strong,” she said.
“Improved confidence around job security has undoubtedly supported household consumption. And our ability to sidestep Covid outbreaks allows for greater freedom of movement.”
But there were are a few signs to suggest that the strength in demand was waning and at the same time, firms were facing rising costs, she said.
“Materials are stuck in transit and firms are fighting over an evaporating pool of skilled workers. Strong demand and strained supply creates an environment primed for price increases. Rampant cost pressures point to rising inflation, if only temporary.”