Householders remain cautious

OPINION: This week we received a timely reminder that just because confidence levels have soared and property shortages, migration, and low interest rates are propelling house prices higher, the largest part of the economy is still not bounding ahead, writes Tony Alexander this week.

That largest part is, of course, household spending, which usually accounts for about two-thirds of spending.

We learnt this week that after removing usual seasonal influences retail spending in July was down by 0.5 per cent from June, which followed a 0.1 per cent decline the previous month. These declines in spending have occurred in spite of both business and consumer confidence measures improving strongly recently and in spite of multi-decade low borrowing costs. Why the reluctance to spend?

First, one needs to note that not all areas of household spending or retailing more specifically are still weakening. After two years of running our old dungers into the ground, we have boosted our spending on cars over the past two months by 3.5 per cent in all. But that gives insight into what is happening in other areas of spending. We have been replacing cars because they simply need replacing whereas, for other things like old couches, stereos, etc, we can keep the old stuff in place and not face either hefty repair bills or injury should something go ping when it is not supposed to do so.

Householders are aware that the labour market remains weak, so that will naturally keep people cautious about spending too unwisely. Some are also still experiencing income shocks from their businesses dairy and tourism operators spring to mind. Plus, referring back to non-car large items perhaps we have already taken advantage of the hefty discounts offered by retailers to get a new TV or washing machine.

Could one say we have decided that higher savings would be a good thing for ourselves and the economy? One would like to think so because ultimately it is the unwillingness of New Zealand householders to save money and our strong desire to borrow it that explains the lack of capital for the business sector, high interest rates by world standards and an exchange rate well out of line with what one would expect, given our large current account deficit and private sector external debt.

But, realistically, given the way the housing market is recovering, it would seem brave to assume household savings behaviour has permanently changed.

It simply looks like consumers are still cautious about their spending even though they believe the economy overall is getting better. It is our belief that this same attitude prevails in the very confident business sector, which makes us express caution about the speed of improvement in business capital spending and hiring. The upturn under way in our economy is not a strong one and there are many risks stemming from still very uncertain outcomes offshore.

The environment suggests business operators should continue to exercise caution in their planning for the coming year, although those with good cash flow and strong capital should probably be actively looking for good value acquisitions.

» Tony Alexander is the chief economist for the Bank of New Zealand.

- © Fairfax NZ News

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