Over the past year, spending by New Zealand households grew by 2.7 percent (excluding the effects of price changes).
That’s not a bad rate of growth. However, it does owe a lot to increases in our population.
New Zealand’s population grew by around two percent over 2016. That’s a very strong rate for a developed economy, with most of that growth coming on the back of record levels of net migration. Over 2016, net migration rose to around 69,000 in annual terms. Around half of that was due to new arrivals to the country, with the other half made up of New Zealand citizens who have chosen to come back from overseas or who have put off travelling abroad. Combined, that’s meant a lot more bodies in stores, and has masked what’s actually be very sluggish growth in per-capita spending. In fact, in the year to June 2016, per-capita spending was up only a muted 0.6 percent in annual terms.
While still elevated, net migration has now levelled off, and eventually it will start to ease back. Over time, as the global economy recovers, young New Zealanders who have put off travelling will venture offshore. In addition, arrivals of international students (who account for a large amount of the increase in new arrivals) have already eased off in response to a tightening in entry requirements. On top of that, students that arrived in recent years will soon start to depart as their courses are completed. Nevertheless, the pull-back in migration is likely to be gradual, meaning a continued boost to the economy’s consumption base for some time.
While migration is continuing to provide a solid boost to spending, there is still a lingering question around the sluggishness of per-capita spending in the New Zealand economy. But on this front, some encouraging signs have started to emerge. Through mid-year, spending levels have been picking up. There have been particularly strong gains in spending on durable items like furnishings, as well as gains in areas such as hospitality (in part related to the strong tourist season).
Spending is being supported by a number of factors. One of the most important is the current very low level of interest rates, which we expect to continue for some time yet. Low interest rates have provided a significant boost to households’ spending power. Importantly, they have provided the housing market with a powerful shot in the arm. New Zealanders tend to hold much of their wealth in housing assets. Consequently, when house prices rise, households tend to feel better off and spend more. The effect is reinforced by increases in the number of home sales, which tend to be associated with increased spending on home furnishings and renovation supplies. Early in the housing cycle, price gains were centred on Auckland, which also experienced solid growth in retail spending. However, over time prices gains have becoming increasingly widespread, with many areas outside of Auckland experiencing double digit gains over the past year.
Also adding to the positive outlook for household spending is the continued strengthening of the labour market. Employment levels have been rising, and an increasing number of business have reported that they are looking to increase staff numbers. Although nominal wage growth has remained sluggish, consumer price inflation has been even lower. That’s meant the purchasing power of households’ earnings is continuing to grow at a solid pace. That’s quite a different picture from what’ve seen in previous years when nominal wage growth was higher, but a rapid increase in CPI inflation meant many households found the purchasing power of their earnings being eroded.
Combined, the aforementioned factors paint a positive picture for household spending over the next while. However, there are still some clouds on the horizon. Most worrying is that in recent years, house debt levels have risen to record levels, equivalent to 165 percent of households’ annual disposable incomes. Debt isn’t necessarily a problem. In fact, it’s an essential mechanism for ensuring the smooth functioning of any modern economy. However, very elevated levels of debt can mean that households are vulnerable to unexpected changes in economic conditions, particularly if they affect their employment situation (for instance, if one member of a household loses their job). In addition, it’s important to remember that taking on debt now means committing future income to debt repayment. And those debt servicing requirements could provide a significant brake on spending in the future.