“Discretionary spending is expected to remain under pressure and consumers could also look at economising their spending on the essentials,” Smith said.
“Further volatility lies ahead, but we expect rises in living costs to continue to outstrip increases in consumer prices. Household budgets are expected to remain under significant household living cost pressures.”
Smith said for most households, incomes aren’t expected to increase by as much as the cost of living.
ASB expects inflation - currently 7.2 per cent for the December year - to move higher in the short term, ending 2023 at just under 7 per cent.
Mortgage pain
Debt servicing will continue to be one of the biggest contributors to households’ costs this year.
Figures from the Reserve Bank of New Zealand show average borrowing costs ended 2022 at 4.35 per cent, up from a trough of 2.83 per cent in September 2021 when the OCR was still 0.25 per cent.
This translated into a 45 per cent rise in interest payments for households over 2022.
Just under 60 per cent of current fixed-rate loans are due to be reset over 2023, the report noted, often at much higher rates.
“All up, the average mortgage interest rate facing borrowers will likely increase by roughly 150ps over 2023, ending the year at just under 6 per cent,” Smith said.
“That would see household debt servicing costs push back towards historical averages from a record low share of household income.
“The increase in weekly outlays averages out to an extra $50 per week per household.”
Smith said impacts would be highly uneven, however.
“More highly indebted households would experience significantly higher increases running into the hundreds of dollars per week,” he said.
“Other households with high interest-bearing deposits and little debt will actually experience a positive impact on after-tax cashflows from higher interest rates. This group, however, is largely in the minority.”
Recent data from credit bureau Centrix showed mortgage arrears rose sharply in January 2023 to a near three-year high.
The number of households behind on mortgage repayments in January was up 22 per cent year-on-year to around 18,400 - the highest since April 2020.
Food and transport costs on the rise
Smith said storms in the North Island had hampered domestic food production, and right now there was “considerable upward momentum” to prices.
Annual food prices soared 12 per cent in February, the most since 1989, according to StatsNZ.
Fruit and vegetable prices had increased by 23 per cent for the year, while the broader grocery category was up 12 per cent.
“We expect food prices to rise about 10 per cent over 2023 ($30 extra each week per household),” Smith said.
Meanwhile, cuts to fuel excises and public transport fares are set to end from the second half of this year, adding to commuters’ costs.
The fuel tax cuts of 25 cents per litre – first introduced in March last year to alleviate high petrol prices and since extended four times – has been extended to June 30.
Half-price public transport, which will also continue until then, is currently estimated to save someone who pays two $5 fares a day $25 a week.
Smith said domestic and international airfares have also soared of late – 35 per cent and 87 per cent respectively from late 2019 levels – and are “unlikely to come down in short order.
“Transport costs as a whole are expected to increase roughly 8 per cent over 2023 ($20 extra per week).”
Rent, housing costs trending upwards
Despite the housing market continuing to soften, housing-related costs continue to point upwards, Smith said.
“Construction costs and those for dwelling maintenance services are expected to continue to strengthen given the multi-billion repair bill from Cyclone Gabrielle on top of already-acute labour shortages.”
He said dwelling rents are expected to push higher still as landlords recoup rising costs and strengthening net immigration adds to the demand for rental dwellings.
Trade Me property data last month revealed tenants are paying 4 per cent more in the last year, with rents hitting a new $595 per week high in January, up $25 per week annually.
However, in Auckland the weekly median is $630.
An 8 per cent annual increase in housing costs (or $30 extra a week) looms, said Smith.
Where to for the OCR?
Smith said ASB expected two consecutive 25-basis-point hikes (April and May) to the official cash rate (OCR) – currently 4.75 per cent – with a peak of 5.25 per cent.
“Inflation is much too high, and the near-term inflation outlook is worrisome given potential cyclone impacts,” Smith said. “The economy was overheating and a period of below-trend growth is needed to push inflation lower.”
He said on the plus side the post-Covid-19 retail spend-up looked to be done with and now the post-binge hangover was setting in.
“Recession will be painful, but it will hopefully cool inflationary pressures, although this is highly uncertain, and the RBNZ will not want to take any chances on rekindling pricing pressures.
“Still, the outlook remains highly uncertain, with the risk of recent financial market ructions proving to be deflationary if they intensify and adversely impact NZ economic activity and employment.”
Last week’s worse-than-expected GDP data blew any fears that the economy might keep running hot out of the water. The economy shrank 0.6 per cent in the December quarter, with manufacturing (down 1.9 per cent) the biggest driver of the decrease.
“OCR cuts will only emerge once the RBNZ is confident inflation will eventually settle below 3 per cent. We don’t expect this to be evident until well into 2024,” Smith said.
“There is also the risk that the RBNZ more firmly taps on the monetary policy brakes if it deems the inflation mandate to be under threat.”
