Tony Alexander | Short-term Pain is Biting | NZHL 

Taken from Tea with Tony October 2022 

The ongoing pain of increases in living costs and rising interest rates are being felt here in New Zealand and by citizens globally. Ironically, the rising interest rates will bring inflation back under control – but it’s fair to say that this short-term pain for long-term gain is biting.  

However, there’s also the good news – improving optimism in New Zealand business confidence, albeit with significant challenges, particularly for the retail sector.  

Here’s Tony’s take.  

Business confidence  

While no one can claim businesses are optimistic, a recent survey shows a net 42% of Kiwi businesses, have a negative outlook for the economy over the coming year, which is an improvement on the month prior (net 62%). 

Many would interpret this level of business negativity as an indicator of recession, however; with businesses still signalling their intention to hire, Tony claims the labour shortage is unique to our current economic climate and gives confidence to everyday Kiwis. 

Salary increases 

With an unemployment rate of 3.3%, the tightness in the labour market would usually indicate an opportunity for employees to negotiate salary increases. But with the minds of central bankers occupied with inflationary surges relating to the pandemic, supply chain shortages, energy and war crises Tony says this is ‘bad timing’.  

When interest rates rise, New Zealand central bankers expect restraint in activity (spending). So, looking at what’s happened previously, they predict the reduction of inflation.  

However, with low unemployment and strong salary increases, they are now questioning whether rising interest rates have made a dent in the labour market yet. Which then needs to be balanced against expectations from employees of a salary increase based on the cost of living. 

The likelihood of a global recession 

Tony believes a global recession is ‘reasonably probable’ and notes the IMF (International Monetary Fund) expects 1/3 of the world’s economy to have a recession next year. Tony explains recession is largely driven by the inflation fight and a strong labour market, however, in Europe, their economic concerns centre around the war, energy crisis, and deficiency of gas supplies. 

According to Tony, there’s still a lot of water to go under the bridge. With Tony’s initial prediction of the Official Cash Rate (OCR) peaking of 3% already exceeded, the recent volatility of  interest rates is something we haven’t seen in a long time. 

Consumer spending  

While consumer spending has fallen away, Tony predicts a lot more to come. With multiple factors challenging, the retail sector, such as a pullback of pandemic bingeing (on spas and the like), interest rate increases, falling house prices leaving homeowners feeling poorer, tightened credit availability, and the reallocation of money for international travel – rather than spending domestically. 

Tony believes the combination of negative factors is affecting demand and could see hefty discounts over the next 6-9 months as the high level of stock previously delayed is now filling up warehouses. 

As the Reserve Bank is targeting consumer spending by raising the OCR, it may look like decreased spending will limit further interest rate rises however, as wage growth is still accelerating Tony cautions, this may push the rates higher.   

Official Cash Rate (OCR) 

With some economists predicting a peak of 4.75% Tony says that although you can’t rule out further rises going this high, and you can’t predict what will happen in this wage environment, he isn’t quite there yet. 

As for the impact of the OCR on the retail rates that New Zealanders will pay, Tony explains if the OCR rises by .25% you would expect to see the floating rate quickly follow suit. However, many banks have already factored rises into longer-term fixed rates meaning you would likely see one-year fixed rates rise but not necessarily the longer terms. 

Interest rate affordability 

According to Tony, the quicker interest rates rise and the higher they go, the faster they will fall again – with interest rates crunching the economy and the economy responding with inflation falling away very quickly alongside interest rates. 

Tony is unwavering in his view that while we will still see rises in the short term, towards the end of 2023 he expects to see a decline. 

Considering this, if Tony were to borrow, he would be looking at a 1-2 year fixed rate. However, he’s quick to caution this doesn’t mean he has complete confidence in when interest rates will fall away due to inflation being under control. 

 “We haven’t had these unique circumstances ever before in a deregulated economy in New Zealand, so people should keep this in mind when looking at their finances,” says Tony.  

There is certainty of further Official Cash Rate rises however, Tony believes there will be a point where this slows down (perhaps as soon as November) with the amount the rate increases by lessening.  

The Kiwi dollar 

A change in interest rates in the United States leads to a change in interest rates in New Zealand due to the ‘transition mechanism’. 

When interest rates go up in the United States, money goes into the US dollar. In response, the Kiwi dollar goes down and the cost of our imports increases, contributing to inflation and rising interest rates here as seen with the 12-cent decline to the Kiwi dollar over the past year causing interest rates to go higher than they would otherwise. 

However, it’s not all bad. A lower Kiwi Dollar is good for our export sector, alongside a pickup in the tourism sector and a growing number of international students showing good support for our underlying economic base. 

The housing market 

Tony reiterates the end game is here for the housing cycle decline. While we can still expect a further fall in prices and a weakening of house sales – taking longer on average to sell, the speed at which the housing market is falling has started to flatten out.     

Tony’s surveys show more first-home buyers asking for advice and actively visiting open homes. Furthermore, while investors don’t yet appear to make a move to purchase, they are starting to show an interest again and will likely be back purchasing in 2023. 

Likewise, Tony expects a slight upturn in housing prices from as early as December and a very small increase in average prices in 2023.  

Finally, Tony advises homeowners or those looking to buy to focus on their ability to adapt to uncertain circumstances as these are set to continue for the foreseeable future.   

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*Please note – Tony Alexander is an independent economist. His views are his own and not necessarily shared by NZHL or vice versa. Tea with Tony is brought to you by NZHL in a sponsored capacity.