Cameron Bagrie – 14 December 2022
Will the Grinch steal Christmas? Not this year, but it is likely in 2023.
Christmas is around the corner and we have an inflation problem. Getting rid of it involves some economic pain. We have partied well beyond midnight; it’s long gone pumpkin o’clock.
When you start seeing the spectre of the dreaded R – recession – on the horizon, behaviour can change, especially when the head of the Reserve Bank wishes people a “wonderful and sensibly-spending Christmas”, trying to crow-bar consumers into restraint. It seemed to work for Black Friday with sales down on the prior year.
Consumer confidence is low, house prices are retreating, household wealth is falling, interest rates are on the rise, and we have a cost-of-living crisis with the inflationary thief syphoning money out of wallets. Food banks are seeing lots of demand, amidst a 3.3 percent unemployment rate. New Zealand is divided, inflation is adding to that, and a divided society makes for an unhealthy economy. Negatives outweigh the positives.
The key fundamental
Amongst all the hurly-burly recessionary talk, one reality is clear. The labour market is hot, and income growth along with it. Income growth is a key variable for spending.
Total weekly gross earnings across the economy increased more than 10 percent in the past year, more than inflation itself. Average weekly earnings for the private sector are up more than 9 percent, and 7.9 percent including the public sector. An economy in “balance” should be seeing solid income growth, but around 5 percent, not double that.
People are working more hours, getting material pay increases, and more workers are being enticed into the workforce to fill vacancies. All positives.
The strength of those earnings figures, relative to the likes of the labour cost index (a measure of wage inflation alone) suggests that employees are using strong positions in a very competitive labour market to increase their pay. It is an environment of promotions, job switching and power to the employee.
Throw in an emerging recovery in the tourism sector. Households have been squirrelling money away too, with $26 billion of savings made since the start of 2020. The Government continues to spend big bucks. Migration looks to be turning a corner.
That combo depicts an economic spending freight train that is going to be hard to stop, even with the cost-of-living squeezing many.
While house prices have fallen by about 11 percent since the November 2021 peak, household wealth in the June 2022 quarter was still $536 billion higher than at the end of 2019.
Light at the end of the tunnel?
Party time and spending patterns are on a collision course with inflation. The light at the end of the tunnel is the Reserve Bank freight train coming in the other direction, resolute to get inflation down.
Household debt servicing costs are rising, but people have been shielded so far. The mortgage rate on bank mortgage books is around 4 percent. Borrowing rates are north of 6 percent. Around $160 billion of mortgage debt will refix in the coming 12 months. Many will be rolling off a mortgage rate below 3 percent to one north of 6 percent.
The path to lower inflation involves further hits to wealth as interest rates rise, eventually less spending, less construction work, a turn in the profitability cycle and higher unemployment. It does not bode well for social metrics. Lots of support structures will need to be around in 2023.
We wish there was a better way. But in the absence of a more dynamic and productive economy – a possibility which requires major reform to unlock – the demand gets will get hit along with the ability to supply.
Watch the switches
Switch #1 – From durables, goods, and big-ticket items back to services, reversing what we saw in 2020 and 2021. Spending on holidays as opposed to a spa pool. E-commerce stalls.
Switch 2# – Inflation versus the environment and sustainability. The latter are important issues but add to costs. The cost of living is the household’s top concern according to the IPSOS Issues Monitor. Value propositions are going to be tested, but will consumers pay?
Switch 3# – Can the government contain spending to help the Reserve Banks inflation crusade, or will election temptations dominate?
Switch 4# – Jobs. Employees are finding it easy to switch jobs. When that stops, income growth will moderate with it.
Switch 5# – The construction cycle. Construction is at the epicentre of the economy and spending. Inflation is not going away unless builders are less busy.
Switch 6# – Rising recognition of demographics. More baby boomers are retiring. The grey force is rising faster than the workforce and the population 65 plus has $550 billion of net wealth.
The bottom line
Christmas spending prospects look reasonable. Next year will be when things really tighten up. A divided society, cost of living crisis, and pending increase in unemployment projected by the Reserve Bank, is a nasty mix. Among the joys of tills ringing, one dominant theme needs to be how we bring New Zealand back together.
Market share will become a key focus for business, along with looking after people. Getting market share in a tougher market brings the fun back into businesses; reward comes from your endeavours beyond the market. It certainly makes a well-earned drink at the end of the week more satisfying.
Written for Waitapu Group by Cameron Bagrie
Bagrie Economics is a boutique research firm that specialises in independent, authoritative analysis of the New Zealand economy and economic issues generally. We don’t do spin or over-complication, just honest analysis of trends and figures.
The views expressed in this article do not represent financial advice.