Recovery under way but not in all sectors

OPINION: There is a recovery under way in the New Zealand economy, but we, like others, feel the best way to describe it is "patchy", writes Tony Alexander this week.

There are pockets of strength and pockets of weakness. There are periods of good data then strings of weak numbers.

One can easily see the strength by looking at indicators such as house sales improving 30 per cent in the past year, prices up 7 per cent, new house building consents rising 25 per cent from a year ago, and business confidence at a 10-year high.

One can also easily see the weakness in housing consents actually falling back in the two most recent months, house sales the worst on record in January, businesses reducing debt, households growing theirs only 0.2 per cent a month, and farmers finally ceasing their debt appetite. Then there is retail spending.

This is one of the most important sectors in the economy. Household spending all up normally accounts for about 65 per cent of spending in the economy and retail spending makes up about two-thirds of that.

Between August and November last year, core retail spending was growing at an annual rate of 5.5 per cent. But now, that rate is the worst since mid-2007 when mortgage rates rose above 10.5 per cent. In fact, retail spending is falling again. What gives?

Primarily we think people are quite rightly cautious because of the still rather bad news regarding foreign economies. But mainly we think there is a strong desire to get debt levels down. We know businesses are reducing debt with business debt down over 6 per cent in the past year. And in the household sector we keep coming across people with mortgages saying they have left their fortnightly repayments where they were as they have rolled off high fixed rates onto the lowest floating rates in four decades.

In fact, a small point needs to be noted here which we have mentioned many times before. When will interest rates in New Zealand settle at much lower levels akin to norms overseas?

Only when Kiwis stop showing willingness to pay interest rates those people overseas would not touch with a barge pole. That appears to be happening at the moment. Whether it continues once the labour market starts firming potentially quickly from later this year is still highly uncertain, however.

Retailers will be hoping the period of household debt aversion ends soon. While one would like to say this is our hope also, frankly the best thing that could happen for the economy is if we all remain wary of debt and start saving for what we want to own rather than borrowing for it.

If we remain more professional in our debt management then, as noted above, interest rates will tend to oscillate at lower levels than in the past and this will tend to deliver lower average funding costs for businesses and a lower exchange rate on average.

Nevertheless, we do expect stronger retail spending soon associated with a soon to be improving labour market. Perhaps, though, this upturn will have to wait until after the Budget and the housing market impact of tax changes affecting residential property investors. The feedback we are receiving on the housing market is that first home buyers are still present but investors have pulled back as they wait for clarity.

The important point we have long been making and continue to make is that new dwelling construction is not strong enough to supply growing housing demand.

In fact, the strength of the construction recovery has just been knocked by consents falling in the past two months and investors pulling out of construction leaseback deals with the likes of Housing New Zealand.

The current period of house price flatness and some weakness is highly likely to be comfortably reversed next year when this supply issue becomes a lot more pressing – especially as the tradespeople head off to a booming Australian economy.

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

- © Fairfax NZ News

Newest First

Oldest First