New Zealand economist Tony Alexander takes a close look at current and future spending trends and how they might affect landscapers
New Zealand’s economy has performed extremely well over the past 17 months, since we emerged from the first nationwide lockdown in May last year. Unemployment did not soar as expected and there are now 36,000 more people in work than just before the lockdown, with the unemployment rate peaking at 5.2% but now back at the 4% of early 2020.
Retail spending volumes in the June 2021 quarter were 10% stronger than in the December quarter of 2019 (unaffected by Covid), and the economy overall in the June 2021quarter was 4.3% larger than late in 2019.
Some of the key factors which have driven our economy upwards are:
1. Spending at home (and on home)
There is about $10bn of spending which Kiwis normally undertake on overseas travel. A survey I recently ran of my 23,000 subscribers showed that about half of that money has been saved or invested and the rest has been spent.
Some 26% has gone on home renovations including front and back gardens, 20% on domestic travel, 12% on cars, and 6% on furniture (both inside and out).
2. Exports and interest rates
Our farming sector has done well with export prices rising strongly after a brief dip, assisted by firm economic growth in China.
At the same time, house prices have soared as people have acted on record low interest rates as home buyers or investors, leading to record numbers of new dwellings being built around the country.
One interesting dynamic of this construction surge is that about 45% of new dwellings are townhouses, apartments, or retirement units compared with an average 27% in the 1990s. In Auckland, 63% of new dwellings are these smaller, attached units as compared with 34% in the 1990s. Outside Auckland, these numbers are 31%, still up from a 1990s average of 24%.
Our economy has also been boosted by house prices rising on average 35% since pre-lockdown, delivering a huge surge in paper wealth, some of which people are keen to spend.
Looking ahead
As we look ahead, it would not be reasonable to believe that the sectors and areas of spending which have boomed beyond expectation since May 2020 will continue to do so. The overall economy looks like it’s doing fine, but reality checks will eventually appear for the beneficiaries of the global pandemic, though perhaps more over 2023 than next year.
The economy is going to remain well supported by a positive outlook for world growth. However, there are many uncertain factors in play which may soon engender some caution about world growth and cap some of our export prices. In China, worries about the US$5tn worth of debt in the property development sector looks like it’s causing a sharp decline in dwelling construction, which will hit demand for steel and other products used in apartment construction and coming from China.
Energy prices are soaring in the northern hemisphere, and this has always caused a slowing in world growth in the past. Supply chains for consumer goods and business raw materials look like they will remain disrupted through all of 2022 and that will add to inflationary pressures and crimp profits for many businesses.
Efforts to slow the pace of climate change will also generate new costs, while at the same time open up many new opportunities. Soaring demand for materials used in batteries such as lithium and nickel is leading to a new mining development boom in Australia, as is development of the hydrogen sector.
Interest rates rising
Interest rates are also rising as inflationary pressures grow more intense. Earlier optimism regarding many of the factors pushing inflation up being just temporary is evaporating, and New Zealand will not be immune to interest rate shocks in the next three years.
Our central bank has started its movement away from the record low interest rates put in place early last year to help fight the effects of the global pandemic. But they have kept rates too low for too long, our inflation rate has risen to 3.5%, wage growth has accelerated, and businesses are indicating record levels of intentions of increasing their selling prices.
At this stage, people are taking a sanguine view of what NZ borrowing costs will do. I have a less optimistic view and suggest borrowers allow for floating and short-term fixed interest rates rising 2.5% from recent low levels, rather than the 1.75% rise pencilled in by the Reserve Bank out to mid-2023.
Landscaping lull?
Will rising interest rates greatly affect consumer willingness to spend on the likes of landscaping? Eventually yes, but perhaps not to a great degree until 2023-24. Over the coming year, the high level of accrued housing wealth, money saved not travelling overseas, record construction, accelerating wage growth, and high job security will underpin demand.
But when raising interest rates, the Reserve Bank has one very specific target which usually they do not state in simple terms. They want consumers to cut their spending. Our household spending typically accounts for 65% of expenditure in the NZ economy and, when inflation needs to be reined in, that is what needs to weaken.
Eventually, with offshore travel restarting and interest rates rising while house prices flatten, consumer spending will be reined in for items like cars, furniture, spas, interior décor and, of course, landscaping. This will especially be for newly built houses where immediate cost savings will be needed by new, highly indebted owners.
But with global uncertainty continuing for a while, these cutbacks are unlikely to be enacted and noticed to any great degree until some point in 2023. Until then, surging house construction and spare wealth (including high bank deposits) will underpin activities like home landscaping through 2022.
Tony Alexander is an independent economist providing regularly free commentary available by signing up at tonyalexander.nz