By Shamubeel Eaqub, Chief Economist, Simplicity Research Hub

Kiwis are still doing it tough. They're being more careful with their spending, and money doesn't go as far.

The volume of spend per person, the chart below, has fallen sharply from highs in 2021-22, when the economy was strong and interest rates were at record lows. The current (Sep-24) level of spending is the lowest since mid 2016.


Figure 1: Retail spend volume per capita
 

This can be explained by three broad factors.

First, rising prices in recent years have taken up more of the wallet. People aren't buying more things; everything just costs more. To cope, people are trading down or doing without. Sometimes it’s trading down from Watties to Pams, or cooking a fancy meal at home rather than going out. But some are also cutting back on basics, like buying fruit and veg less often (in 2023 around 40% of households didn't buy these items in a given week). But there is good news: retail prices were flat over the past year. Expect to see discounting in the coming months to encourage spending.

Second, as people came off pandemic low fixed mortgages, higher mortgage payments squeezed out other spending and reduced saving. It was a real shock for some. But this is turning into relief now. In December, those refixing will go from an average rate of 6.3% to a lower rate: the current 2-year fixed rate of 5.7%. Lower interest rates by the Reserve Banks in New Zealand (RBNZ) and globally are feeding through now (both of which affect mortgage costs). On average refinanced rates will be around 1% point cheaper, compared to last couple of years when people fixed at up to 3% point higher!

Third, there is a continued air of caution. Mindset matters. When there is financial stress (43% of households are financially worse off compared to last year, while 21% are better off according to ANZ-Roy Morgan consumer confidence survey) and uncertainty about job and career prospects (job ads are down 30% from last year, but has crept a little higher since August), it is hard to make big purchasing decisions (furniture for example).

For retailers, this is a difficult trading environment heading into the traditionally busy Christmas trading period (we usually see a seasonal lift in November and December). In difficult economic times it's really important to carefully segment your customers and match your sales efforts to each. What and how you sell to different customers has to be different. Marketing is a necessity. In a tough economy, growth comes from market share.

Slowing net migration and fiscal austerity will continue to lean against the economy for some months to come yet.

While this Christmas period may not be that jolly for retailers or consumers from a selling and buying perspective, there are emerging positive signs (so far more hope than action).

The biggest support will be from further interest rate cuts by the RBNZ. Cheaper money will provide relief initially - which will put a floor under the economy, and eventually encourage new borrowing and investing, which will super-charge the recovery. But it may be some months yet.

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