The big lifts in costs came from essentials such as food, fuel, and shelter, economists say
New Zealand households would likely have to spend an additional $150 per week over 2023 to keep up with the soaring cost of living, an ASB report has suggested.
In an economic note, Mark Smith (pictured above), ASB chief economist, said the increase in weekly household outgoings would likely be driven by higher consumer prices and debt servicing costs.
“Impacts will be highly uneven, with increases much more than this for more heavily indebted households,” Smith said. “With income growth unlikely to keep pace, household spending is likely to struggle in 2023. Discretionary spending is expected to be under pressure, with households also likely to economise on essential spending. Whether this will be sufficient to cool inflationary pressures and prevent further hikes in the OCR remains to be seen.”
While annual consumer price inflation currently sits at 7.2%, with the figure tipped to remain elevated over 2023, household costs jumped by 8.2% over 2022, partly due to a 45% rise in household interest payments.
The big lifts in costs came from essentials such as food, fuel, and shelter.
“Further volatility lies ahead, but we expect rises in living costs to continue to outstrip increases in consumer prices,” Smith said. “Household budgets are expected to remain under significant household living cost pressures.”
The ASB economists said just under 60% of current fixed-rate loans were due to be reset over 2023, often at much higher rates.
“All up, the average mortgage interest rate facing borrowers will likely increase by roughly 150ps over 2023, ending the year at just under 6%,” Smith said. “That would see household debt servicing costs push back towards historical averages from a record low share of household income. The increase in weekly outlays averages out to an extra $50 per week per household.”
The impacts would be highly uneven though, they said, with the more highly indebted households will experience significantly higher increases of up to hundreds of dollars per week. Other households with high interest-bearing deposits and little debt, meanwhile, will see a positive impact on after-tax cash flows from higher interest rates, although this group is largely in the minority.
The ASB economists said a “post-binge hangover” is setting in following the post COVID-19 retail spend-up.
“For most households, we don’t expect incomes to increase by as much as the cost of living,” Smith said. “This will likely see the household sector saving buffer shrink over 2023, with aggregate household dissaving possible by the end of the year. This could see the $30bn saving buffer that households built up over COVID-19 start to be whittled away. The impact of recent flooding and Cyclone Gabrielle (not all of which will be covered by insurance) could further erode household saving but could provide a welcome boost for some retailers.”
The ASB economists expected household sector activity to retrench over 2023.
“This will weigh on broader economic activity and we expect modest recession for the NZ economy over 2023,” Smith said.
The bank is forecasting two more consecutive 25bp hikes, in April and in May, and for the OCR to peak to 5.25%, as the Reserve Bank continues its fight against inflation.
“OCR cuts will only emerge once the RBNZ is confident inflation will eventually settle below 3%,” Smith said. “We don’t expect this to be evident until well into 2024. There is also the risk that the RBNZ more firmly taps on the monetary policy brakes if it deems the inflation mandate to be under threat.”
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