KEY POINTS:
The four key economic indicators at present are the housing market, retail sales, unemployment and inflation.
Data on all these have been released in the past 10 days, giving us an opportunity to assess how the economy is travelling and its short-term and medium-term outlook.
The housing market
is the most important indicator because its strong performance in recent years has had a major positive impact on the economy, both directly and indirectly through consumer confidence and retail spending.
Reserve Bank figures show the total value of houses surged from $228 billion to $614 billion since the end of 1999 and now represent 75.3 per cent of gross household assets compared with 64.8 per cent at the end of the last decade.
The huge increase in residential property values boosted consumer confidence and led to a rise in equity withdrawals and a fall in savings.
Equity withdrawals are the release of equity through the sale of a house or an increase in borrowing against the rising value of a residential property.
There isn't any specific data on this development in Australia or New Zealand but a 2004 survey by the Reserve Bank of Australia estimated about 7 per cent of households made a net withdrawal of equity by increasing the debt on their existing property.
The median withdrawal was A$20,000 ($24,730) with more than half of this used to finance consumer spending, including home decor, holidays, motor vehicles and other consumer durables.
A November 2006 paper by the Reserve Bank of New Zealand concluded about $7 billion of housing equity withdrawal had occurred since 2003. The Reserve Bank couldn't accurately determine where this was spent. Its best estimate was that a high percentage was reinvested in extra property assets with the remainder spent on home improvements, motor cars and general consumption.
The paper concurred with an International Monetary Fund study that found rising house prices and equity withdrawals led to a reduction in savings. This is logical as escalating house values boost confidence, individuals have less concern about their future financial security and they spend rather than save.
The severe downturn in the housing market, which began in the middle of last year, has almost completely reversed the buoyant confidence of the past seven to eight years. Consumer sentiment has slumped and equity withdrawals are a thing of the past. Individuals are now more concerned about their future and are looking to repay debt, save and defer consumption.
The April housing figures, which were released by the Real Estate Institute on Monday, were dreadful.
Sales for the month were only 4464 compared with 8194 in April last year and an average of 8860 for the previous five Aprils.
Total sales for the first four months of the year were down 41.5 per cent from the same period last year.
April's median price of $345,000 was 1.1 per cent lower than April 2007 and 2 per cent below the all-time high of $352,000 last November.
The median price will fall further over the next few months because historic trends clearly demonstrate that when sales volume declines prices follow suit a few months later.
The housing market downturn has had a dramatic impact on consumer confidence and the retail sector.
The NZ Roy Morgan Consumer Confidence Rating has plunged from 126.3 to 92.7 since the end of last year.
Retail sales statistics, released on Thursday, confirmed that the retail sector is under severe pressure. Actual sales for March were down 1 per cent compared with March last year and 1.2 per cent lower than February this year on a seasonally adjusted basis.
Local dairies are suffering the most, closely followed by appliance retailers, motor-vehicle distributors and furniture/carpet retailers.
Petrol price rises are having a big effect on consumers as spending on fuel rose from $519 million in March last year to $626 million this March.
The retail and housing data both show the top end of the North Island, mainly Auckland and Waikato, are experiencing the biggest downturn. Wellington is relatively buoyant, Canterbury is flat while Southland is benefiting from the dairy boom. Waikato has not been able to take advantage of the surge in dairy prices because of the recent drought.
As a rule of thumb the further one travels up the country the worse it gets.
A number of listed retailers have recently confirmed that conditions are extremely difficult including:
* The Warehouse reported sales for the three months ended in April were down 4.3 per cent compared with the same period last year.
* Briscoe's sales for the same three-month period fell 6.4 per cent.
* Hallenstein's sales for the 14 weeks ended May 11 were down 5.3 per cent on the same period last year.
This is the first time in living memory that three major listed retailers have reported year-on-year sales declines in excess of 4 per cent.
The other big announcement in the past 10 days was the employment and unemployment statistics for the March quarter. These showed that unemployment rose from 3.4 per cent in the December quarter to 3.6 per cent. More importantly, actual employment numbers fell 0.2 per cent compared with the March 2007 quarter and an unexpected 2.2 per cent since the December 2007 quarter.
These were critical figures because of the widely held view that interest rates would stay on hold as long as the jobs market remained tight.
Interest rates eased when the March quarter employment statistics revealed this was no longer the case.
The New Zealand dollar also dropped in anticipation that Reserve Bank rate cuts would occur sooner rather than later.
All eyes are now on Reserve Bank Governor Dr Alan Bollard and next few interest rate announcements on June 5, July 24 and September 11.
Dr Bollard hasn't wanted to reduce interest rates while the housing, retail and employment markets remained strong. But now that the housing and retail markets are in a downward spiral and the employment market is showing signs of weakness, then the chances of an interest-rate cut by September 11 are better than 50/50.
The Reserve Bank is now in a much better position to reduce interest rates because retailers will have little ability to pass on cost increases due to higher import prices in a weak economy.
Thus the outlook for the remainder of the year is for lower interest rates and a further decline in the value of the NZ dollar. However, the full benefit of this will not flow through to the household and retail sectors as mortgage rates will stay high. This is because our major trading banks raise a high percentage of their funds from short-term offshore wholesale markets where interest rates remain high.
The retail sector will also be adversely affected by a substantial decrease in equity withdrawals and a strong consumer preference to repay debt and save more. The latter trend is clearly evident in the huge response to the new KiwiSaver scheme.
The good news is that Bollard has considerable scope to cut interest rates and the next six months could see the worst of the economic downturn.
By this time next year we should be looking at a more optimistic short- and medium-term outlook for the New Zealand economy but the next upturn will be led by export and savings, rather than residential housing.
Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.
bgaynor@milfordasset.com
