Editorial: Hang in there Kiwis, the long cold winter is here

The economy is at the crossroads as households face a long, cold winter with rising costs and falling asset prices. Photo / Otago Daily TImes

Editorial

EDITORIAL:

Winter has arrived and with it a sense of dread about the months ahead as households contend with rising costs, falling asset prices and slower economic growth.

Everyone's circumstances are different but in general households and businesses are starting to feel more downbeat, which will influence spending, economists are saying.

The latest survey by NZIER of financial and economic agencies suggests we are in for much slower economic growth and much more persistent inflation than earlier forecasts predicted.

Some big events this week will not have gone unnoticed.

First was confirmation that stock markets, including New Zealand's NZX, have fallen to levels colloquially known as bear territory. That is based on a more than 20 per cent fall from the most recent peak.

Like their namesake, bear markets are not friendly. They should be respected and feared.

At the same time, we are seeing house prices fall in response to monetary policy tightening as central banks try to curb rampant inflation by raising interest rates.

This week the US federal Reserve raised interest rates by three-quarters of a point – the largest hike in nearly three decades.

Borrowing costs have already risen sharply here in New Zealand as the Reserve Bank takes a similar stance.

Wednesday's figures from the Real Estate Institute showed a 6 per cent decline in house prices since November, with the agency's index falling for the sixth consecutive month.

The plus side to this, of course, is that house prices needed to correct after a long, long period of growth, rising faster than incomes and locking first-home buyers out of the market.

So too for equities, which have been propped up artificially by record low interest rates and massive economic stimulus – most recently in response to the Covid-19 pandemic, but more or less since the global financial crisis more than a decade ago.

But people are already feeling much poorer as their KiwiSaver balances go backwards, the value of their house falls and inflation eats away at their income.

House prices have fallen six months in a row now. Photo / Fiona Goodall

The big questions are, what this will do to the economy and how long it takes to work through?

Over half the country's stock of fixed-rate mortgage lending is due for refinancing this year, according to the RBNZ.

Because the average rate across this stock of lending remains relatively low, the full effect of rising rates is yet to be felt.

And as fixed lending gradually turns over, that sucks money out of households who eventually go on to spend less, and raises costs for businesses at the same time.

Yesterday's GDP figure for the March quarter was worse than expected and economists have downgraded their expectations to zero growth for the current quarter.

While Omicron's handbrake was evident in shrinking the economy in the latest quarter, the rising cost of living including mortgage payments is going to be evident in at least the next two.

But it's important for Kiwis to stay positive.

There will be a lot of households who still have savings built up over the past two years. Hopefully that will see a more resilient economy than you might expect.

And let's not forget unemployment is at record lows.

With any luck it will be a short, sharp jolt rather than a dull, aching headache.