'Households are showing us the weakness': How recession is hitting New Zealanders

Thursday, 15 June 2023

So what exactly will the impacts be?

Gross domestic product (GDP) data released on Thursday showed the economy has hit a technical recession – and households are bearing the brunt of the pain, economists say.

Stats NZ data for the March quarter showed the economy contracted by 0.1%, making two consecutive quarters of falling GDP.

But on a per capita level, the contraction was bigger. New Zealand’s population has surged in recent months due to an influx of migration.

ASB economists said, on that basis, GDP was down 1.1% in the December quarter and 0.7% in March.

* Recession or not, brace for tough times, economists say

* Rate of inflation drops: What does this mean for interest rates?

Economic activity is likely to be underwhelming for some time to come.

Disposable income per capita was down 2.2% and 0.9%, respectively.

“Households are showing us the weakness,” Kiwibank chief economist Jarrod Kerr said.

“That’s where the weakness is. Consumption has been very weak and will continue to be weak. The news we’ve been given today is old - it’s from the first quarter and we’ve already moved on but data from today points to further weakness, credit card data is softening, retail trade numbers are much weaker than expected.

“Households are tightening their belts, they've been hit by the cost of living crisis. The combination of those three things is really hurting households at the moment.”

Westpac chief economist Kelly Eckhold said the situation was probably “actually feeling quite bad” for households.

“Each New Zealander’s share of the GDP pie has got a bit smaller.”

He said things were likely to be tough for some time to come. “Our projections suggest below-trend growth for the next year or 18 months. What that means is low, albeit still positive growth but in the context of still reasonably significant population growth, that per capita growth story is pretty negative for a while yet.”

Brad Olsen, chief executive at Infometrics, said household consumption was down year-on-year and the 11% fall in spending on durables was the biggest since 1990. Non-durable spending was down 6%.

GDP is the last piece of New Zealand's economic puzzle every quarter.

ANZ chief economist Sharon Zollner said it would feel like a recession for households.

“Times will be feeling tougher, but nothing like 1991.”

She said a key bright spot was the low unemployment rate and consumers still rated their job security highly. “There’s a real mismatch between that and the Reserve Bank’s forecast for unemployment. It could be interpreted as their best guess of what needs to happen to get inflation down so one does wonder if that perceived job security could be on borrowed time to an extent.”

ANZ and BNZ have both increased home loan rates this week, potentially squeezing households further, but commentators said it was unlikely there were many more interest rate increases to come.

The Reserve Bank has signalled that it thinks the current 5.5% official cash rate is likely to be the peak, although some commentators have suggested it may need to go higher.

Olsen said the GDP news would be a sign to the Reserve Bank that its strategy was working.

“Inflation is starting to move in a better direction… the number simply that the Reserve Bank is on the right track. For them, it's one thing to take the foot off the brake, which is what they’ve done by saying they think they've done enough with interest rate rises. It’s a whole different story to slam your foot on the accelerator and drop interest rates.

“I don’t think that will be a particularly quick option. They’ll be wanting to wait until 2024 and they have confidence that inflation is under control.”

Zollner agreed and said the central bank would be pleased to see some weakening of inflation in services, which had taken over as the price pressure point.

Kerr said by the end of the year it would be clear that the economy was “much weaker” than the Reserve Bank or Treasury had forecast.

“This is the peak now. We should see lower mortgage rates by the end of this year.”

UBS economists said the fact GDP came in lower than the Reserve Bank expected lowered the likelihood of future OCR increases.

“However, weak growth did not previously deter the Reserve Bank from unexpectedly hiking by 50bps in April; so CPI data remains key. The market is pricing only a cumulative 10bps of hikes until October, so it is assigning a low probability of further rate hikes.”