Economy warning - brace yourselves

Rozanna Wozniak

The economic "soft landing" hailed by policy makers and economists this year is an illusion and the worst is yet to come for debt-laden households, according to Rozanna Wozniak of funds manager Arcus.

Associate Finance Minister Trevor Mallard and some bank economists were among those who welcomed figures showing economic growth in the first half of the year had rebounded from a dismal performance at the end of last year.

"If you look at the headline growth figures, it looks like we are past the worst," said Wozniak, the Arcus chief economist, at the firm's quarterly investment strategy update yesterday. "We don't believe that's true."

Wozniak cited the measure of real gross national disposable income per capita, which adjusts for domestic income earned by foreigners and foreign income earned by New Zealanders.

It was down 2 per cent in the June quarter compared to the same period a year ago.

"Suddenly the soft landing we thought was happening doesn't look so soft any more."

That was reflected in the poor showing of the New Zealand sharemarket, which barely managed a positive return during the September quarter while markets in other developed countries thrived.

But Arcus, which manages $4.5 billion of assets for New Zealanders, believed companies had strong balance sheets and were in better shape than households.

Wozniak said the big wealth gains households had made over the past few years had been mainly in housing.

New Zealanders had boosted their wealth by buying houses, mainly with foreign capital, "and then sitting back and watching them increase in value".

"Unfortunately, we leverage against these higher housing values to fund consumption and buy even more houses, creating a never-ending cycle of rising debt levels."

Although debt-to-asset ratios were improving, debt-to-income levels were worsening.

"An increasing proportion of our income is being used to service debt, leaving us with less to spend on consumption."

The growing burden of servicing debt had started to bite consumers, and was reflected in the difficulties finance companies faced.

And New Zealand had yet to go through the housing market adjustment which the US was now experiencing and through which Australia and Britain had passed. "Potentially, the worst for us is yet to come."

Arcus investment director Mark Brighouse said the recent outbreak of price competition between major banks on fixed rate mortgages could delay that adjustment but could also increase its severity.

"Things could be tougher because those mortgages are ultimately funded by foreigners. That wedge between our GDP and our income gets greater with every new mortgage that's written."

And housing assets did not provide a store of money that could be used to maintain consumption levels as income growth slowed.

"New Zealanders can't really generate much income as a group by selling houses to each other ... They don't have much income-generating ability for New Zealand Inc."

Deutsche Bank chief economist Darren Gibbs said the economy's recent performance was consistent with a soft landing, but he agreed that New Zealanders were not benefiting because a growing proportion of the resulting income was going overseas.

Hard times

* The economy's "soft landing" is an illusion, says Arcus Investment Management.

* Recent economic expansion has benefited mainly foreign investors, and New Zealand's per capita national income has declined.

* Rising house prices have done little to protect households against harder times.