On The Up: Is self-belief the missing piece of the economic puzzle?

“I think we’re in that point of the cycle where things are improving, but people won’t believe you if you say it,” says ANZ chief economist Sharon Zollner.

“So under the hood, we have turned the corner, but it’s going to take some time for people to believe it ... which is the same as saying it’s going to take some time for consumer confidence to recover.”

Zollner has a good handle on the level of confidence in the New Zealand economy. She and her ANZ team produce the long-running Business Outlook and Consumer Confidence surveys.

Over the years, they’ve mapped the ups and downs of the economy through a self-reflecting lens.

The surveys ask consumers and business owners about their overall confidence in the immediate economic outlook.

They also probe deeper, asking businesses how they feel about their own outlook and whether they plan to invest more or hire more staff in the near future.

Consumers are asked whether they expect to be better off in the next year and how likely they are to buy a major household appliance.

Right now, business confidence is strong. The March survey showed topline confidence holding steady and firms’ expectations around their own performance getting better - albeit slowly.

But consumer confidence has faltered this year, raising concerns that the recovery has stalled.

So, how material is confidence to the actual performance of the economy? Can our perceptions be self-fulfilling?

“How consumers are feeling, their willingness to spend can have a huge impact,” Zollner says.

“It affects their willingness to borrow, but also how much they want to save.”

So for the retail sector in particular, it’s absolutely crucial, she says.

By way of example, she highlights big GDP revisions late last year that wiped away the two recessions we thought we’d had (in 2023 and early 2024) but replaced them with “an absolute doozy” in the middle of last year.

“What was interesting is that consumer confidence took a real dive on those recession headlines and then eventually bounced back.”

That represented genuine lost income for the retail sector “that they’re not necessarily going to get back anytime soon”.

“So, those headlines absolutely do matter,” she says.

“If people go, oh, are we all supposed to be watching our spending now, then they might reduce their spending even if actually their job security and their cost of living hasn’t changed that much relative to their incomes. It absolutely can happen.”

Meanwhile, we’ve just had headlines revealing that we bounced out of recession late last year.

They should help things.

However, Zollner adds a dose of grim realism about the numbers.

“It was somewhere between 0.6% and 0.7% growth [for the fourth quarter] after falling more than 2% in the previous six months,” she says.

“We’ve really just started crawling out of the hole, but we’re on our way.”

Business optimism

When it comes to business confidence, it is particularly important for investing decisions.

To put it simply, when businesses feel upbeat about the future, they are more likely to take risks on expansion – hiring more staff or increasing production or opening more stores.

“We have a question in our business survey: What is driving your investment decisions? and it’s always the economic outlook,” Zollner says.

“It’s a big scary decision to invest or indeed to take on a new staff member; if you don’t have that confidence, you won’t do it, no matter what the GDP statistics are saying.”

There’s no doubt a gulf has opened between what the stats are telling us about the economy and how people are feeling.

But perhaps when we look at the wringer the economy has been through since Covid that’s not surprising.

At the topline level, things are looking good: we’ve got GDP growth, interest rates are falling, inflation is back on target and export earnings are strong.

On the business side, there was a big bounce in confidence late last year, but it hasn’t translated into increased investment.

“Business confidence had a record high ... the obvious interpretation would be that people expect stuff to go gangbusters, but that’s not the right way to interpret it,” Zollner says.

Topline business confidence is simply the net proportion of respondents who are saying things are going to get better rather than things are going to get worse.

“So given what we now know, we were in a very, very deep hole. The bar for things to get better is extremely low.”

BNZ economist Doug Steel has expressed concerns that confidence may be unrealistically high.

“Judging by historical relationships, the strength in activity expectations is consistent with annual economic growth of over 4%,” he says in a recent report.

“That is well above what folk are forecasting, including the RBNZ.”

The NZ Institute of Economic Research recently published its Consensus Forecasts report, and the verdict was an expectation of 2.1% growth for the year to March 2026.

The economic recovery is progressing, Steel says.

“At face value, these indicators suggest the pickup may be faster than we, and the RBNZ, currently forecast.”

If that were the case, it might be a mixed blessing.

A bit more growth would be welcome, but if the economy grows above its current capacity (which Treasury has estimated to be about 2.5%), then it risks reigniting inflation.

Consumer gloom

Any flare-up in inflation would be bad news.

While economists are happy to see that annual inflation has fallen back into the RBNZ target band (it’s currently 2.2%), the reality is that for the public, the cost-of-living crisis rolls on.

Prices haven’t fallen; the rate of increase has just abated. So the 2% extra at the supermarket comes on top and has accumulated 20% or more across the past four years.

On top of that, many fixed costs – like electricity, rates and insurance – have continued to rise at a higher pace.

A recent IPSOS poll of the big issues troubling Kiwis found that inflation remains the biggest concern, ranked top of the list by 50% of people.

That was down from 55% in the same poll late last year, but inflation is well clear as the number one issue.

In second place was healthcare (41%), and the economy as a whole was third, rated the top worry by 30% of respondents.

“People despise it,” Zollner says of inflation.

“One of my favourite charts in my presentation is inflation flipped upside down versus consumer confidence,” she says.

“You go back to 2021, we had the tightest labour market in recent recorded history. We had 9% wage growth, which was outpacing inflation. Anyone could get a job, anyone could get two jobs if they wanted.”

We also had the biggest housing bubble in the world going on.

That isn’t great for everyone, she says, but given that housing represents a large proportion of household wealth in New Zealand, it typically makes people feel better.

Despite all of that, consumer confidence “went off a cliff” to levels lower than we saw during the global financial crisis.

“That was inflation,” she says.

As inflation has fallen, we have seen consumer confidence coming back.

“But it’s been a bumpy trip.”

While inflation expectations rose very quickly, they’ve come down very slowly.

Consumer confidence and consumer inflation expectations have been very closely linked in recent years, Zollner says.

“So actually, consumers get the forecasting prize for picking that inflation was taking off well before professional forecasters, the Reserve Bank, and businesses.

“Consumers were the ones who were absolutely on the money.”

But what we’ve seen is that while inflation expectations rose very quickly, they’ve come down very slowly.

“Consumers still think inflation’s almost 4%,” she says.

“If you were to ask them why, they’d say, have you seen the price of this? Have you seen the price of that?”

Consumers are less inclined than businesses to project forward. They think in price level terms.

“They won’t believe inflation’s low until they’ve gotten used to the new price level and their wages have come up to match,” Zollner says.

And that is a slow process, thanks to rising unemployment and job insecurity.

Until the unemployment rate peaks and employment growth improves, the opportunity for workers to shift jobs for better pay, or even bargain for better raises, is limited.

That equation is expected to shift from the start of the year, but again, it seems a painfully slow cycle to turn.

“Job losses and business failures represent the very real human costs of recession, Zollner says.

“But they’re also both lagging indicators that reflect accumulated stresses over the previous period. They don’t tell you about where the economy is going now.”

The other thing that really matters for consumer confidence is the housing market.

If people were expecting falling interest rates to kick-start a new housing boom this year, they’ve been disappointed.

That’s probably good news for first-time home buyers, but it means a traditional driver of consumer confidence is missing.

When house prices are rising‚ Kiwis feel like they’re wealthier - even if it’s just a paper gain.

“Clearly, the confidence in that market has increased, but we’ve also seen an even bigger lift in listings,” Zollner says.

“People have been waiting to sell a house, maybe to move into a retirement home or to upsize or downsize or move or whatever it might be. They’re going, right there’s some liquidity back in the market, now I can offload this house.

“That has meant buyers still have heaps of choice, so prices are going nowhere fast now.”

But that’s just a stage, she says.

“Prices will eventually start to lift again. Our pick is in the second half of this year, and that tends to take consumer confidence with it.”

There’s a widespread understanding that this recession was deliberate, Zollner says.

The downturn was caused by the Reserve Bank raising interest rates to get inflation under control.

We went through one of the steepest accelerations in rates ever seen.

The OCR went from a record low of 0.25% in September 2021 to 5.5% by May 2023.

Rates have now come back a long way, Zollner says. And they probably have a bit further to fall.

“If that was what caused the problem, then it should be the solution,” she says.

It just takes time to fully transmit to the mortgage rates people are paying.

So we’re on the up, even if it doesn’t feel much like it.

“That the recovery is in play is undeniable,” she says.

“The really encouraging thing is that it’s across every sector of the economy.”

In the latest Business Outlook, the sectors – like construction and retail – that have had the biggest crunch, because they are most sensitive to interest rates, have seen the biggest bounce in terms of what they are saying they have experienced in the last month compared to a year earlier, she says.

“It’s definitely happening.”

Where the debate lies is the extent to which this will be a sustained recovery, she says.

“Is this just what they call in financial markets, a dead cat bounce ... that’s just reflecting the low starting point and it’s not going to come to much.

“Is it going to peter out, or is it going to become something more self-sustaining?”

Next: The cause for optimism, the big export engines leading the recovery ... and what needs to happen to keep it rolling.