When will ‘greenshoots of economic recovery’ reach our wallets?

Sunday, 20 October 2024

Tax cuts, falling inflation, mortgage rates set to follow; all the financial stars are aligning, so when do we get to feel less cash poor? Kevin Norquay talked to the economists.

Kiwis are moving away from the terrible treble: climbing prices, higher mortgages and falling house prices. The Reserve Bank has won the war on inflation and tax cuts have had four months to kick in.

Great, so when will we feel a little less cash poor? Survive to 2025 is the mantra, economists tell the Sunday Star-Times.

By then we could be able to look vegetable prices in the eye, or enter a petrol station without breaking into a cold sweat. Job cuts will be largely over, with mortgage rate cuts instead coming into play.

Consumer confidence and financial options will leap.

But real financial growth is going to take longer, and will depend on New Zealand lifting productivity - we need to work smarter and harder, says economist Cameron Bagrie.

“lf you're not getting decent productivity growth, your living standards aren’t going anywhere,” he says.

“New Zealand’s average productivity growth for the last 10 years has been 0.2% per year. In order for New Zealand to be better off, we need to get that productivity story up over the next decade. We can't have another decade of 0.2%.

“Temporary lower interest rates get people to feel happier and get out and spend more … but ultimately, you need substance behind it, and substance comes from productivity growth.”

OECD projections put the world average GDP growth at 3.2% for 2025, with New Zealand below that at 1.9%, flanked above by Portugal and Spain, and below by the US.

Still, Kiwibank chief economist Jarrod Kerr this week has pointed to the start of a golden summer.

“Pay rises are finally running above inflation. The cost of living crisis is coming to an end, slowly. It may not feel like it, yet, but inflation has eased, and will ease further,” he says.

Consumer price inflation has slowed to 2.2%, within the Reserve Bank's 1-3% target for the first time since March 2021. Economists expect it to continue slashing rates, so mortgages will fall.

Most Kiwis are headed toward better off.

The oft cited example from Finance Minister Nicola Willis is an interest rate reduction from 7% to 6.25% for a family with a 25-year $500,000 mortgage would reduce their payments by just over $50 a week.

Under tax changes that kicked in on July 1 a minimum wage earner has been better off by $12.50 a week, while a single adult earning $55,000 a year has had around $25.50 a week more.

Conversely, if you don’t have a mortgage and are staring at less interest on your savings, then you’re left with only reduced inflation to celebrate - prices won’t climb so quickly.

So are we noticing a change in mood yet?

Wellington landlord Michael Weaver told the Sunday Star-Times the last two years had been the toughest of his 24 years in business, so he was looking forward to it picking up.

“I am looking forward to things improving, I think the property market is going to start to pick up later this year and early into next year.”

Rates and insurance costs had soared, younger tenants had gone overseas when the borders opened post Covid, leaving 10% of his properties empty.

His rental income had dropped 15% from the height of the 2022 financial year. Profit has dropped even further because he opted to spend money to improve and upgrade the properties while they were empty.

“The last two years have been difficult, and I've exhausted most of my reserves. Luckily, I'm not in dire straits but there are certainly people really hurting out there, and they're looking forward to some relief.

“As an investor and a landlord, your first major cost is your mortgage, then it's between the insurance and the rates.”

When his mortgage bill reduced, he would keep mortgage payments the same to more swiftly pay down principal.

“I'm not looking to increase rent, just to fill up properties, so I'm not greedy. I'd rather get a place rented than have it sitting there empty, because I would have had at least six properties empty for most of the past two years.”

John Thwaites manages the Golf Warehouse store in Wellington’s Thorndon. He has seen a lift in interest in the sport, with people more intent on finding the time for themselves since Covid, as well as money woes easing.

“Ours is a little bit more Covid-related, where people are reassessing their lifestyles,” he says.

“We haven't seen this sort of sudden …‘wow, I've got way more money,’ you can definitely sense it, but I wouldn't say that we've seen some massive uplift’.”

There has been a spending lift in what he calls incidental expenditure, such as balls and gloves, more than in big ticket items such as clubs and sets.

“Our trend is definitely lifting. We're seeing a lot more juniors and females playing, but probably not quite as many of the brand new male golfer as we would like.”

Independent economist Anthony Byett says the answer to when people will start to feel a little better off depends on whether we’re talking “months, years or decades”.

Byett bristles at the view the financial situation will improve, if we just sit back and wait.

“We need to dispel this notion of a shower of money, it very infrequently happens,” he says.

“For some people, there is now more hope of selling a house or business … that will happen, those people will get richer over the next few months.

“For most of us, it's about planning, making yourself more valuable, increasing your own productivity. It takes planning and investment and positioning with education.

“When all that comes to fruition it will be years down the track … in the medium term - two or three years - the global economy is pretty tough at the moment, the local economy is pretty tough, I don’t think it’s suddenly going to pick up.”

Be patient, says Craig’s investment advisor Mark Lister.

“You've got light at the end of the tunnel now … businesses might still be struggling, but at least they can see hope on the horizon, which is something they haven’t had for a long time.”

Lister says the economy has hit an important turning point and there will be a change in backdrop for the economy, for consumers, for borrowers, and for financial markets.

“Will that make people rich? No, it will make them less poor. The typical household won't be facing such a high mortgage burden.

“As we all come off, our 7% mortgage rates will sort of get down to 5 or 5.5%, so that will absolutely take the pressure off.

“We have just got to balance off the optimism and temper that enthusiasm around lower inflation, lower interest rates, with the fact that people are actually still losing their jobs out there, and that will probably continue for a little while.

“Recovery is not far away, but it's not right here on our doorstep. It's probably a 2025 story, by February or March, that's when you will actually start to see more evidence of things starting to take effect.”

Another beacon of hope lies in house prices, which have fallen in recent years.

“I suspect those falls are behind us,” Lister says.

“They're not necessarily going to take off again, but it will be good to see them at least stable. Housing is really important for the New Zealand psyche, for most people, it's their biggest asset. When house prices fall, you're a little reluctant to spend or do things.”

Cameron Bagrie, too, targets housing as a core issue.

“The economy is going to grow in 2025, if the economy grows … we will get back on track, in my mind on the road for a little more positivity,” he says.

In the next five years New Zealand had to get productivity right, improve its infrastructure and get education to turn out the right skills, as well as getting the housing market right.

“There’s a big list of things we have got to do.”

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