Liam Dann: Can we shop our way through a downturn?

New Zealanders still shopping. Consumer confidence is holding firm. Photo / File

COMMENT:

Can we shop our way through an economic downturn?

After cutting rates to a record low this month, Reserve Bank Governor Adrian Orr called on consumers to spend more and businesses to invest more.

Based on two key confidence surveys released this week, only consumers were listening.

The ANZ Business Outlook survey on Thursday was ugly.

Both business' confidence in the general outlook and confidence in their own prospects fell to lows last seen in the global financial crisis.

Investment and hiring intentions now look grim for a number of sectors including construction and agriculture.

But today's ANZ-Roy Morgan Consumer Confidence Index showed sentiment rising in August - just.

Confidence

It's still slightly below the historical average but it rebounded from a bigger fall in July.

Consumers' perceptions of their current financial situation rose, with a net 16 per cent feeling financially better off than a year ago.

A net 27 per cent of consumers expect to be better off financially this time next
year - a six-point bounce-back versus last month.

And a net 39 per cent think it's a good time to buy a major household item,
unchanged.

"Households are feeling relatively robust at the moment," said ANZ chief economist Sharon Zollner.

That was good news for retailers, she said.

But is it sustainable?

Can consumer spending head off a recession in the face of a slowdown in other more productive sectors of the economy?

Paul Gruenwald, chief economist at S&P Global Ratings, thinks it might be.

New York based Gruenwald, who visited Auckland this week, notes that consumer spending now accounts for nearly 70 per cent of GDP in the US.

In New Zealand that figure is more like 57 per cent.

Consumer confidence is holding up despite business gloom. Photo / File

So even as trade-war woes hit market confidence and sectors like manufacturing and agriculture in the US, recession was not a certainty, he said.

Volatile equity markets and gloomy bond markets, with inverted yield curves, make the headlines.

"That's a path to pay attention to," he said.

"But really, the more important one for the US is employment, wage growth and consumer spending. That's going to be the big driver."

As long as employment and consumer confidence stay solid there is likely to be a baseline of at least some GDP growth.

So far unemployment levels have remained stuck near record lows in both the US and New Zealand.

We saw unemployment fall to just 3.9 per cent in the second quarter.

Despite that, there was still concern around the employment outlook in New Zealand, ANZ's Zollner said.

"While the labour market is undeniably tight at the moment, that appears set to change," she said.

A key downside risk over the year ahead is that employment indicators have deteriorated.

That is to say the employment intentions section of all the major business surveys, and actual job ads, point to less hiring.

If there's anything that will stop your shopping spree in its tracks, its losing your job.

To get a sense of the balance between business and consumer confidence, ANZ puts together a composite index.

Closely tracking actual GDP growth the combined index provided a better indicator than either series individually, Zollner said.

Unfortunately it still shows a negative trend.

It suggests we could see GDP growth dipping at least as low as 2 per cent in the next six months (It's currently 2.5 per cent year on year).

But that's not a recessionary slump.

"The composite remains within recent low ranges, in line with our pick that
while economic growth slowed this year it is finding a floor," Zollner said.

"We expect that the 50bp OCR cut delivered in August will filter through to
consumers in time which should lift confidence, as long as the labour market
holds up."

So there's hope. Get out there this weekend and have some fun, buy those new shoes.

You'll be doing your bit for the economy.

Consumer power won't be enough in itself to stave off a slowdown, but it will play an important role in maintaining momentum as we head through a tough part of the economic cycle.