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(Image: Getty; additional design: Tina Tiller)

PartnersJune 20, 2023

Inflation, migration and the cyclone rebuild: an expert take on the economy

Guest writer

(Image: Getty; additional design: Tina Tiller)

With interest rates steadily rising over the last 19 months, it seems we have finally reached the peak. So what does this mean for households, businesses and the cyclone rebuild? Kiwibank chief economist Jarrod Kerr weighs in.

At a glance:

We have reached the peak. According to the RBNZ, they are done hiking, having lifted the cash rate from just 0.25% in 2021, to 5.5% today. The next move should be a rate cut, early in 2024.
A lot has changed in the last 9 months. The economy has softened. It’s an awkward period for households, rolling onto higher interest rates, and businesses face new challenges. But it’s not all doom and gloom.
Net migration has exploded. And we expect to see some green shoots in the housing market.

The cost of living crisis means our incomes are not keeping up with inflation; we’re getting a lot less for our money. Add onto that a surge in interest rates and many households and businesses are hurting.

Households and businesses with debt are now paying a much larger proportion of their income on interest. Household budgets are being stretched thin and businesses are reducing their investment and hiring. Confidence among households and businesses has also been hit by the fall in house prices.

The good news is interest rates may have peaked. Since October 2021, the Reserve Bank of New Zealand has been hell-bent on dragging inflation back down to 2%. They have yet to achieve this, with the current rate at 6.7%, but they think they have done enough. That’s an important message for Kiwi households and businesses. We have likely seen the peak in lending rates, and as with all peaks, we will come down the other side. Tailwinds are coming.

Kiwibank chief economist Jarrod Kerr (Photo: Supplied)

For every upside risk, there are three downside risks

The RBNZ is forecasting the cash rate to remain on hold at 5.5% well into 2024. There are risks to both sides of this forecast. If the upside risks come through, the RBNZ may be brought back into the fray, and forced to hike again. Then there are the downside risks. We expect to see rate cuts sooner than forecast by most commentators and the RBNZ.

“…higher net immigration, a slower decline in house prices and higher government spending are offset by the lower starting point level of GDP and consumer price inflation as well as a more negative outlook for our goods exports.” (RBNZ MPS, May 2023)

The upside risks to migration and government spending have engulfed the airwaves, with many commentators calling for more hikes. We disagree.

We have seen an outsized +65,000 in net migration over the last year – that’s a lot of people coming here looking for work. The surge surpassed our optimistic forecast of +35,000. But most of the spike in migration was pent-up demand. Migrants who would have come here over the last few years, but couldn’t due to border restrictions, are coming now. We think migrant flows will naturally fall back, and so does the RBNZ. “The big surge in immigration is behind us,” says RBNZ governor Adrian Orr.

Faster population growth increases demand for just about everything. Migrants take rentals or buy houses, putting upward pressure on rents and house prices. They also put greater demand on our infrastructure, health system and education, because more people equals more demand. But they are also coming at a time of chronic staff shortages across most industries. Most migrants are aged between 20 and 40 and keen to work. Migrants boost the capacity of the labour force and put downward pressure on wages. The RBNZ has taken the view that the migrant boom will be less inflationary than many fear.

The cyclone rebuild and government spending will be inflationary, but maybe not as much as many fear. It is difficult to gauge how inflationary the rebuild will be. But at this stage, it is likely to be less than initially thought. Fears of government spending may be exaggerated and it is also likely that there is continued underspend. The government may continue to struggle to get funds out the door fast enough. The economy is weaker, and government spending may hit at a time of reduced aggregate demand.

There are more risks to the downside. Government tax revenues have come in well below forecast, with both GST and corporate tax undershooting. The downshift in the government’s coffers confirms the downshift in spending on Kiwibank credit and debit cards. Household consumption looks to be contracting. And confidence among businesses and households has soured.

Demand is being weighed down by rising interest rates.

If households spend less, which is what we are seeing, then the economy will contract harder. If businesses pull back on their hiring and investment, which is what we’re hearing, then the economy will contract harder. If these downside risks dominate, then interest rate cuts will come sooner.

Kiwibank’s new branding (Photo: supplied).

It’s all about inflation

Imported inflation is easing, but it’s homegrown inflation that concerns the RBNZ. Inflation is only forecast to fall below 3% late in 2024. It’s still a long journey back to the 2% target. The good news is, we’re on the way.

The forecast slowdown will drive a loosening in the labour market. Add to that the migrant-led increase in labour supply, at a time when demand is turning south. We may see the unemployment rate rising to between 5% and 5.5% in 2024. As the labour market loosens, its inflationary impulse will soften.

The NZ housing market will bottom, soon

There are three drivers of the housing market. Firstly, the peak in interest rates should mark the bottom in the housing market correction. Falling mortgage rates should support confidence and activity in the warmer months. The dominant headwind will soon become a tailwind. Secondly, the demand/supply imbalance will worsen. The surge in migration and the loss of dwellings at high risk of climate change will only exacerbate the housing shortage.

Finally, the residential construction boom is turning south. The number of dwellings coming to market will fall back from very high levels. Supply had outstripped demand in recent years – with record high dwelling completions and low population growth (prior to the migration rebound). All three drivers point to a strengthening housing market.

The true litmus test for the market will be in spring, when we expect to see an uplift in confidence and activity.

The New Zealand dollar will help exporters (Image: Getty)

The dollar will help exporters, not importers

The New Zealand currency has lost a lot of ground following the RBNZ’s peak rates announcement. If this is the peak in the OCR, and we think it is, we expect to see further falls in the dollar from here. Our long-held forecast is for 0.55c by year end. Softer export prices, weakening growth, and compliant inflation, means lower interest rates, and narrowing interest rate differentials.

The fall towards 55c will help offset weakening commodity prices for exporters. Unfortunately, a weaker New Zealand dollar makes imported goods more expensive. We have factored in the softer dollar and still expect to see a sharp deceleration in imported inflation.

Keep going!

Image: Archi Banal

PartnersJune 19, 2023

How to deal with the increasing cost of getting around

Russell Brown

Contributing writer

Image: Archi Banal

Later this month the government’s fuel excise duty will be added back to petrol prices. With money already stretched thin for many, what can be done to make our dollar go further at the pump?

It’s the nature of the times that most of us are looking for ways to reduce the cost of living – and that includes the cost of being mobile. Price shock at the petrol pump isn’t quite the same experience now that it was last year, when fuel prices were extremely volatile following Russia’s invasion of Ukraine. But there’s one increase we know is going to happen soon.

The 25 cents-per-litre fuel excise duty cut by the government as a cost-of-living measure last year comes back to the pump on June 30. Add on GST and that’s nearly 30 cents a litre more on our petrol bills from that date.

But with driving the only practical option for many people around the country, how can we make sure our fuel is going the distance? From changing how you drive, to changing when you drive and how you purchase fuel, there are many ways to make the most of the expensive drop.

One of the ways you can reduce the impact of this price rise is by reducing your need to buy fuel in the first place, says Automobile Association policy director Terry Collins.

“Your right foot on the accelerator is the biggest input,” he says. “Accelerate slowly away from the lights and anticipate the red light – take your foot off the accelerator and roll up instead of putting your foot on the brake. If you put your foot on the brake, you’ve just got rid of all the energy you’ve paid for. You can save anywhere between 10% and 40% on petrol usage driving in the city, just by the way you anticipate traffic and drive.”

Z’s chief executive officer Lindis Jones agrees, adding that “making sure that you’re not carrying around that set of golf clubs all week in your car if you’re only going to use it at the weekend,” can also reduce fuel consumption.

Even if you don’t own a hybrid or EV, there are easy ways to help keep the tank fuller for longer – such as tyre pressure, which is an important one to check as the seasons change.

“Tyre pressures – or PSI in tyre talk – are subject to temperature, so if you pumped your tyres up a couple of months ago in summer, they’re going to be lower now because it’s winter and it’s colder,” says Collins. Low tyre pressure increases the resistance of your tyres on the road, which ends up using more petrol.

Higher-end cars with cruise control features will even let you choose better fuel economy on the open road – and could save you between 15 and 30% on fuel consumption, says Collins. If you drive a hybrid, there’ll be a display on the dash that shows you when you’re effectively driving as an EV and not burning fuel – there’s a reason that Uber drivers take off very slowly.

Collins also suggests paying attention to loyalty schemes that translate to fuel discounts. “Some of them are quite substantial, like 50 cents a litre. So if you’re going out shopping just look around the loyalty programs and see who offers you discounts at other stores.”

Collins buys his fuel on a credit card he pays off every month, and converts the loyalty points he earns into fuel vouchers. “So not only am I using my discount card for fuel, I’m also using my credit card to get discounts for more fuel in future.”

There is also, of course, the very sound option of simply not using your car so much.

“I take public transport into work,” says Collins. “And I happily do that, because I avoid parking. If it’s a big shop I’ll take the car, but if it’s only some stuff, I’ll go for a walk. I think people have just got to get into the idea of not doing the 500 metre car drive. The car will use more petrol because it’s not able to get to operating temperature. If you’re going out, put a whole lot of jobs together – combine a whole bunch of things into one trip as opposed to just going on each individually.”

“I’m a keen cyclist,” says Z’s Jones. “So whenever I can, I cycle to work. It’s great to see new cycleways being built. The more cycling we see out there the better.”

But what if you could buy your future petrol now, and skip the incoming excise hike? That’s what Z’s Sharetank model is best for.

“What Sharetank does is almost like hedging in the stock market or the foreign exchange. The app looks at all of Z’s service stations within a 30km radius and allows you to buy fuel at the cheapest rate, regardless of where you are,” says Collins. “You have a virtual petrol tank where you can buy anywhere between two and 1,000 litres.

“Z will allow you to buy the fuel before [the price] goes up and you’ll still be able to get your fuel at that price after the fuel excise duty goes back on,” Collins says.

“The resumption of the fuel excise duty will be another reason for people to look at fuel prices and manage their expenditure accordingly,” agrees Jones. “Sharetank is one way of doing that. You’ve still got price variation between sites which is a sign of healthy competition, but it’s a way of taking out the guesswork for Kiwis trying to find the cheapest price day to day.”

Jones says the company launched Sharetank fairly quietly three years ago, but it has picked up “several tens of thousands” of users and they’re “incredibly loyal” once they start. “Some of them use it to manage fuel purchases for family members, and then some small businesses use it because it’s got everything around GST invoicing and is a useful way for small fleets to purchase fuel.”

In the future of course, EVs – currently running at about 10% of new vehicle purchases – will be the majority of the light vehicle fleet. Z has been talking about that change longer and louder than any other fuel company.

“We’re doing more than making plans,” says Jones. “Our target is to have high-capacity EV charging at 20% of our sites by the end of the year. That’s just the start, but it’s our commitment.”

Z recognises EVs will not be the only transport means in the future. There are many ways people get around in Aotearoa, though the choices are often forced upon us by lack of access to broad transport infrastructure. For Jones, an ideal situation would see New Zealanders have far more options to get from A to B – consisting of a better balance of private cars, rideshares, public transport, walking and cycling.

“Public transport in New Zealand also has a real role in reducing our carbon emissions. It’s absolutely critical that customers feel like they’ve got a legitimate choice in going about their lives – but I’m not sure that they always do at this point in time.”

Until that point, making the most of the fuel we do use can help to both reduce our carbon footprint and spend less at the pump, which at a time like now, is a welcome relief.