ANALYSIS: Last week I mentioned early results from my monthly Spending Plans Survey, which showed a collapse in people’s willingness to spend. The final numbers confirmed the early indications with a net 11% of the 1,368 respondents saying they are going to spend less in the near future. On average since June 2020 a net 23% have said they will spend more.
This statistic is very weak, and so are these ones. On average a net 1% of people since June 2020 have said they will cut spending on eating out, and the last result for 2021 was a nice net positive 11%. Now, a record net 35% say they are not going to spend more eating out. Also, a net 1% say they’ll be cutting domestic travel. This time last year that reading was positive 39%.
Omicron, combined with the high increase in our cost of living, rising interest rates, and plain old tiredness of the pandemic have sent us deep into our shells. A number of operators in the hospitality, events, and accommodation sectors risk closing down as we head into winter.
With so much fear now in our society it seems more reasonable than ever to expect a brain drain once we can freely travel to and return unhindered from, Australia in particular.
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Loss of valuable staff across the Tasman is going to be a substantial challenge for businesses this year and next, and the risk of continuing net migration outflows will reinforce the slowdown in the housing market already now entrenched – though not yet apparent in the many out of date monthly measures of price changes.
Other housing challenges will be rising interest rates, especially now that central banks in England, the Eurozone, and the United States have said inflation is more worrying than they earlier realised. Catch-up monetary policy tightening is going to have to be initiated.
The current credit crunch may run for a few more months, but it pays to acknowledge something important. We are probably in the worst of the CCCFA crunch right now. Young first home buyers have been told they have to prove they can slash spending on discretionary items over at least a three month period before a bank can factor such lower spending into debt servicing calculations. So, they are cutting spending eating out etc. before applying again come autumn.
Economist Tony Alexander: “Young first home buyers have been told they have to prove they can slash spending.” Photo / Fiona Goodall
Will the Government water down the legislation? Comments by the Commerce Minister blaming banks for supposed “irresponsible lending” prior to December 1 suggest either no changes or only marginal ones. After all, bank submissions on the law changes made it abundantly clear what the lending implications would be of the new law. The Government ignored advice they sought.
Speaking of warnings, the Reserve Bank conduct their next review of monetary policy on February 23. They are 99% certain to raise their cash rate at least 0.25% from the current 0.75% level and I see a good chance they bump it up 0.5%. When that happens not only will the trigger be pulled for higher floating mortgage rates, but we are also likely to see a fresh round of rises in fixed mortgage interest rates.
Those rates are currently well below average levels versus bank funding costs, especially following the hike in global rates after last Friday’s extremely strong job and wage numbers in the United States.
Most borrowers in New Zealand for some months have been favouring the two- and three-year fixed mortgage rates over the one-year and 4- to 5-year terms. That tendency is likely to continue through 2022 until we reach the point maybe next year when floating becomes optimal. But we are well away from that unusual situation just yet.
- Tony Alexander is an economics commentator and former chief economist for BNZ. Additional commentary from him can be found at www.tonyalexander.nz
