To spend or not to spend - which way Kiwis will go in 2024

Thursday, 11 January 2024

Economists believe retail spending is scraping the bottom of the trough, and can only improve.

Retail spending was largely flat last year despite record migration, and in the last three months of the year dipped below spending at the end of 2022.

ASB senior economist Mark Smith said the high cost of living has been a driver for ho-hum spending levels over the past year, encouraging consumers to “keep their wallets well hidden”.

He said inflation is expected to cool slightly this year, which should mean good news for retailers. “Research on living costs are showing that they are slowing, which is certainly a positive factor,” he said.

While Smith believed 2024 will see retail spending recover some ground in the second half of the year, he said it was not likely to recover by much.

“The employment outlook is going to be the major dampener for consumers. We’re going to see more and more job losses this year, and that will encourage people to conserve whatever cash flow they have for a rainy day,” he said.

“In the last six months of last year there was a lot more restraint by consumers. After the post-Covid rebound, reality set in and it has been more of a struggle,” Smith said.

“Consumer durables spending has been softening, and that dynamic I think will hold through this year as well. For households, it is going to be much more of a ‘let’s get through this year’ approach.”

Smith said card spending was flat last year despite population growth of, hitting a 20-year high -- that was a indicator of how impacted spending had been in 2023, as typically higher net migration would mean an increase in spending.

“If there wasn’t strong population growth, we would have seen retail spending per person down around 5%, and with inflation [pushing up spending], that is very soft.

“We think card spending will be a bit brighter this year.”

The Reserve Bank is trying to squeeze inflation by engineering a slowing of domestic spending through increased interest rates, economists say.

Economists are hoping to see the official cash rate (OCR) cut in the second half of the year, which could also provide a boost for retail spending, along with a cooling of inflation.

They also expect the housing market to improve towards the end of 2024.

Westpac senior economist Satish Ranchhod said the high OCR was having a dampening impact on the economy, and without recent rate hikes inflation would be running at a much higher level.

Ranchhod said the current inflationary environment meant every household was feeling the impacts of high prices, particularly middle-income families who had in recent years purchased a home.

He said 2024 would be “a challenging balancing act” for the Reserve Bank to try to further curb inflation.

Total retail spending for 2023 was about $121 billion, up around 2% on the $119b recorded in Stats NZ’s retail trade survey in 2022.

Smith estimates price inflation was around 5.5% in 2023, and retail volumes fell by 3%.

He said there are signs that the retail slowdown was coming to an end, but the employment outlook would ultimately determine how much spending occurs this year.

If people feel secure in their jobs, they are likely to spend more. If they feel insecure, it will encourage them to hold on to their money.

“We should see improvements in the second-half of this year, but it is not going to be a huge rebound given the employment outlook.

“With retail spending, you can’t keep it down for too long because there is a bit of a bungy cord dynamic.”