Kiwis still not saving for rainy day despite repeated warnings, says ANZ

Monday, 10 April 2023

ANZ economist Finn Robinson expects the official cash rate to hit 5%.

There’s a term in economics, the precautionary savings motive, which refers to the point where consumers see enough trouble on the horizon that they start holding onto their cash for a rainy day.

ANZ chief economist Sharon Zollner said Kiwis still have not reached that point, despite repeated warnings from the Reserve Bank about a looming recession, and stance that it would manufacture a slowdown if necessary to tackle inflation.

“The Reserve Bank has been doing its best to freak people out and make them a bit nervous and make them save a bit more and spend a bit less, but so far they’ve got limited tractions,” she said.

Meanwhile, high inflation could not solve inflation, Zollner said.

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“All you’re going to get is higher wage inflation. If inflation solved inflation we wouldn’t have had the 1970s,” she said.

“Inflation is annoying, but it’s not a reason not to spend all your money.”

Infometrics principal economist Brad Olsen agreed Kiwis still were not changing their habits despite most knowing a cliff was coming.

He said there was a disconnect between recent consumer confidence surveys, which all showed households felt the outlook was grim, and spending data.

Sharon Zollner says prices are too high but that doesn’t mean they can’t rise.

“You look at spending activity, and you’re pretty hard-pressed to find any of that negative sentiment.”

Data released last week showed an 8.6% year-on-year increase in spending, which was above inflation, showing Kiwis were still spending more.

“I do think there’s an element of people knowing it’s coming, but not necessarily adjusting heavily until it hits.”

He said the precautionary savings motive would only be triggered in most Kiwis when things “hurt like bugger already”.

Zollner said the Reserve Bank’s pre-Christmas 0.75% hike to the official cash rate (OCR) had rattled people, but come January and February they were back to spending.

“It’s like people went away for Christmas and forgot they were supposed to be scared,” she said.

Brad Olsen says the Reserve Bank’s decision to make a smaller-than-expected OCR increase in February may have hurt the long-term outlook, as people took it as a sign things were getting back to normal.

The bank hiked the OCR 0.5% last week – a larger hike than most economists predicted.

Zollner said the decision proved inflation was at the top of the bank’s priority list.

She said higher mortgage rates were taking more money out of some peoples’ pockets, which had a knock-on effect on some consumers spending, but most were still happy to keep spending.

Once the precautionary savings motive did come into play, it would like be felt across the economy.

“People’s decision about whether they need to put something aside for a rainy day can have a big impact on the economy as well,” Zollner said.

“Consumption tends to be very smooth compared to the likes of business investment and exports, which are all over the shop, but it’s huge, it’s more than half of GDP, so when it does move it has a big impact.”

A wage-price spiral, where workers demand higher wages to keep up with the cost of living, which become costs for suppliers, which results in higher prices, was the “roundabout” the Reserve Bank was trying to get the economy off, Zollner said.

A wage-price resulted in everyone being poorer as any savings or reserves devalued – a point Zollner said Reserve Bank chief economist Paul Conway recently made in a speech.

“It’s a valid point, but I’m not convinced of the power of a speech to change people’s decision-making.

At the end of the day people will respond to the incentives in front of them, and they have a very strong incentive to get every dollar they can out of their employer, and push up their prices if everyone else is to maintain their margins.”

Zollner said while the Reserve Bank’s actions was bringing forward an economic slowdown, the country was always going to have one.

“This economy has been running on hyper speed, we’ve been living beyond our means for a long time.”

“The fact is our current account deficit has blown out to nearly 9% of GDP and at some point the world is going to look at us and say ‘we’re not funding that any more’ – and then that adjustment would happen anyway, it would just be more brutal.”

“You cannot avoid gravity.”

Zollner said the Reserve Bank was beginning to get tractions, and the lag between a change in monetary policy and the effects could take a while.

Olsen said his answer to any friend who asked if they should start saving now, was yes.

“I said this personally to the people I knew, and publicly to anyone who interviewed me, summer was the time for the financial detox,” he said.

“The best time to do it was yesterday, the second-best time is today.”