The Big Squeeze

Q1 GDP data released in June showed that the New Zealand economy has fallen into a technical recession. But technical recession or not, the economy does seem to be faring better than one might expect given the double whammy of high inflation followed by high interest rates. The expectations that many had in 2022 of a substantial slowdown have not come to pass yet.

And anecdotally, the slowdown appears to be missing in action. Restaurants are bustling and shops busy. The Mint team were down in Wellington recently and observed queues for tables and a bustling CBD.
Many facing the squeeze will be wondering where this activity is coming from. Food prices are up 12% [1] over last year. For households with mortgages, the aggregate share of their disposable income used for servicing debt will move from a low of 9% to 22%[2] by the end of this year.

For now though, several items are helping deflect the interest rate squeeze.

The first, is that the labour market and wage growth remain robust. The unemployment rate is at 3.4%[3] and average hourly earnings rose 7.6%[4] . Only circa 30%[5] of households have a mortgage to service. For young people, rents and living costs have risen but wages have helped to cushion some of this inflation pain. For retirees without mortgages and with savings, term deposits are now yielding far more attractive rates than they were a few years ago. This is cold comfort to those facing down escalating costs, but it has at least helped to reduce some of the squeeze.

Also supporting the economy is tourism and net migration. Net migration is above the 2020[6] peak and well above historic averages.

For the squeezed middle, mortgage arrears are ticking up, but the pain is distributed unevenly. If you fixed in mid-2021, then your interest rate costs have increased substantially. This represents circa 25%[7] of the current stock of mortgage lending. Average effective mortgage lending rates are expected to reach 6.1%[8] by the end of this year. But this is still below the 2008 peak. And in that time, nominal household incomes have increased.

So where is the pain from higher costs and rates being felt the most? The agricultural sector is feeling it – dairy prices have declined over the last six months while input costs have risen.

The commercial property sector is another affected component of the market. Prices have fallen and interest rate costs have risen meaning less wiggle room to manage tenant stress. Fortunately, the banking sector has been largely prudent with their lending practices and banks are reporting that businesses which managed to survive the pandemic are resilient, meaning tenant defaults are less elevated than they might have been.

After our bumpy touchdown in Wellington, we know gentle landings are difficult to pull off when facing multiple crosswinds. While we may now be in a technical recession, we don’t foresee the economy taking a material nosedive. We also expect inflationary pressures will recede and this will give the Reserve Bank of New Zealand more scope to hold here and not push through further rate hikes.