NZ may have entered recession as consumers obey Reserve Bank and cut spending

Wednesday, 18 January 2023

Reserve Bank governor Adrian Orr fronts up to MPs in wake of hawkish monetary statement in November.

Consumers cut their spending using electronic cards in December, once those figures were adjusted to take into account it is usually a high-spending month, Stats NZ has reported.

ASB senior economist Mark Smith said the spending figures meant the economy might have shrunk in the December quarter and could already have entered a recession.

“I certainly wouldn’t rule that out,” he said.

A recession would be confirmed if overall economy activity was found to have declined in both the December and March quarters.

Stats NZ reported that spending using electronic cards fell 2.5% in seasonally-adjusted terms, from spending in November.

The fall came after the Reserve Bank forecast in November that the economy was heading for a shallow recession this year and governor Adrian Orr signed off a hawkish monetary policy statement by wishing everyone a “sensibly spending Christmas”.

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December is normally a big-spending month and the seasonally-adjusted drop may mean NZ could have entered a recession earlier than expected.

In actual dollar terms, spending still rose in December, but the increase was smaller than normally seen at that time of year, Stats NZ said.

Stats NZ manager Ricky Ho said the drop in the seasonally-adjusted figure was the first for nine months.

Seasonally-adjusted spending fell across five of the six retail sectors that Stats NZ tracks, with the exception being spending on groceries and liquor which has been one of the bigger sources of inflation and which was up 1.5%.

Spending on “durables” such as furniture, hardware and appliances took the biggest hit, declining 5.7%.

Westpac senior economist Satish Ranchhod said the retail spending figures were softer than expected “adding to signs that the domestic economy is turning down”.

“For most of 2022, households were continuing to dial up their spending on discretionary items despite large price increases,” he said.

“It seems that New Zealand households are finally heeding the Reserve Bank governor’s advice.”

But the Reserve Bank was likely to continue hiking the official cash rate (OCR) given “we’re yet to see signs that inflation pressures are cooling”, he said.

The acid test would be inflation figures due out next week which Westpac expected would “still point to red-hot price pressures”, Ranchhod said.

Smith agreed the die had already been cast for more rate rises but said it was possible that the weakness in household spending could see “eventual OCR cuts brought forward”.

”Weakness in household spending could see the Reserve Bank potentially scale back the 125 basis points of hikes it has signalled for early 2023, but the inflation outlook should take priority and it is unlikely to wobble unless it is ‘110%’ confident inflation will settle in the 1% to 3% inflation target range,” he said.