Households outlook glum but slightly less so

While the online quarterly Household Expectations Survey of about 1,000 households nationwide revealed a pessimistic outlook, the figures have actually decreased with the reported chance of missing a rent payment down 3.4 percentage points from last quarter.

Households think house prices will rise 0.6% over the next year and by 6.2% in five years, which is up from 4.4% last quarter, but lower than a 7% expectation a year ago.

They are expecting a 6% hike in wages over the next 12 months, up from 5.8% in the last survey. This question is only put to the employed and 45.3% of survey respondents think their earnings will increase, a 3.9% rise compared to the last quarter of 41.4%. In turn, the proportion of people who expect their wages to remain unchanged dropped by 4.7 percentage points to 47.2%.

Short-term and medium-term inflation expectations remain high, but long-term remains within the Reserve Bank’s target range of 1-3%. On average households expect 7.4% inflation in a year’s time, although it was at a peak of 7.3% last year and fell back to 6.7% at the March quarter.

Expectations for inflation in two years’ time have risen to 4.5% this quarter, a two percentage points increase from the previous quarter’s reported value of 2.5%. Many of the participants were unaware of the fall in inflation, as the survey coincided with the Statistics NZ CPI figures released on 20 April. The RBNZ might not be too happy with the survey results as it struggles to get inflation under control.

The survey was taken before the Government’s inflationary budget, which revealed more than $8 billion of additional spending over five years, making the RBNZ’s job harder.

Household budgets to tighten

Meanwhile Westpac still expects the economy to slow down significantly in the year ahead, as mortgages continue to roll on to higher rates.

However, the bank doesn’t expect an outright recession due to a resurgence in migration. An inflow of about 100,000 people is expected over the rest of this year, with population growth hitting 2.5%.  

“Admittedly, this combination of a slowing economy and surging migration is unusual. People move to where they see opportunity, so New Zealand typically sees strong inflows when the economy is doing well,” economists say. “But the current migration surge is not being driven by the economic cycle but a product of the restrictions during the Covid pandemic.”

These inflows will eventually run their course, but it’s quite uncertain where they will peak in the meantime.

Complex effects

Migration has complex effects on the economy, adding to capacity and demand to varying degrees across different sectors.

Economists say the RBNZ regards migration as an inflationary force on balance and given it is already stretched meeting its inflation target over the “medium term”, it doesn’t have time to see how the effects of migration surge play out.

The other inflation risk raised by the RBNZ at its policy review last month was fiscal stance, Westpac economists say. 

A boost in fiscal spending has been on the cards for some time – not least because, as the Treasury has been pointing out, existing spending allowances won’t be enough to withstand cost pressures in the public service.

That risk has now materialised. The operating balance is expected to remain in deficit until the June 2026 fiscal year, and even the wafer-thin surpluses that are projected beyond that point could be at risk if the economy doesn’t live up toTreasury’s optimistic growth forecasts in those later years, they say. 

“It’s difficult to translate this into what it might mean for the level of demand and inflation pressures in the economy, but it clearly adds to the pressure for a higher OCR peak than the RBNZ was previously looking at.”

That will come down to the strength of its assumptions around the migration rebound, the inflationary impact of the Budget, and emerging signs of life in the housing market.

However, if it lifts OCR projections to as high as 6%, past behaviour suggests it would be eager to get to that endpoint quickly – a 50 basis point hike this week is a real possibility.