The Christmas period for the retail sector looks set to be grinch-like and the country should brace itself.

That's because the casualties of grumpflation are appearing — consumers' pockets are being hit and firms' profitability is being squeezed.

The lower New Zealand dollar, while desirable and long overdue, will accentuate near-term grumpflation, my term for slowing growth and rising pressures on costs.


The costs of a lower kiwi appear quicker than the downstream economic benefits and boosts to the export sector. Tourism tends to benefit quickly as tourists spend more as our dollar falls. But the impact on petrol prices is the quickest game in town.

Rising petrol prices are siphoning money out of consumers' wallets and adding to distribution and transport costs. It's a losing trifecta at the pump with a combination of rising international oil prices, a lower dollar and lifts in fuel taxes. The economy is still fossil-fuel reliant. Higher fossil fuel costs dent profitability.

The price of imported products is rising as the dollar falls. The kiwi is still elevated, though retailers are now ordering stock which will be potentially more than 10 per cent higher in price compared to the start of the year. They would like to pass that on. Good luck with that.

Profitability expectations from the retail sector are the weakest of all the sectors, according to the ANZ Business Outlook Survey. Retailers expect less activity, are curtailing investment and hiring less.

Households have a negative savings rate. This means they do not have a precautionary savings buffer to lean on when petrol moves up in price. Price rises hurt.

This will be one factor behind waning consumer confidence. Wages might be set to accelerate but household costs including rents, rates, insurance and petrol are rising faster.

A lower New Zealand dollar is long overdue and welcome. It will put money into exporters' pockets and provide some earnings backbone for the economy over 2019 and 2020. But it will take time for the boost to accrue across the economy.

The lags between a lower currency and growth and employment are long. It takes time for firms to gear up and take advantage of a lower currency. A lot of New Zealand's export are rural and supply constrained.


For instance, the pipfruit sector will take time to conjure up more trees. We don't sell a lot of widgets, where the production handle can be turned quickly.

The economic signals are unlikely to have firms salivating over export prospects either.

Firstly, the New Zealand dollar is still pretty elevated. Growth in China is looking shaky, protectionism is a real threat, local wage costs are set to rise, a lower dollar lifts imported plant and machinery costs, and we have lots of Government policy uncertainty.

The reason behind a weaker currency is critical too. If driven by global unease, commodity prices can follow.

Commodity prices, in New Zealand dollars, have fallen in three of the past four months, but are still elevated compared to last year.

Often a weaker dollar just reflects a deteriorating global environment which negates the benefit.

We haven't seen much adjustment in the kiwi versus the Australian dollar (AUD) either. It's down, but still above A90c. Given how the Australian housing market is performing, the cross is likely to remain elevated.

Australia is our closest and most easily accessible trading partner (though some non-tariff barriers challenge that). The cross matters for businesses looking at testing the export waters.

I've noted some media commentary saying the New Zealand dollar is at global financial crisis lows.

We are a country mile off such levels. It's just below 0.56 against the euro. It's at 73 against the Japanese yen. It's trading around 0.49 against the Great Britain pound and just under 0.65 against the United States dollar.

The exchange rate on a trade-weighted basis is still above 70. The average since 1999 is just below 70. The average since the dollar was floated in 1984 is way below that.

Way back in the darkest hours of the global financial crisis, the New Zealand fell below to US50c. We were at 0.35 against the pound. The kiwi was under A80c.

Currencies tend to overshoot in times of stress and that was certainly the case with the kiwi. By the end of 2009 it was back up over 0.70 against the USD as the bungy cord kicked in.

The kiwi dollar might be trending lower, but we're a long way off lows. We're simply the lowest we've seen for a number of years. The kiwi should still be on the high side too. The terms of trade (ratio of export prices to import prices) is elevated.

Currencies do tend to go in cycles though. Material periods of strength and elevation tend to be followed by periods of weakness and under-valuation.

The kiwi has been elevated for nine years. Consumers have benefited hugely via cheaper products and imported goods deflation. It's been cheap to holiday and travel.

The movement so far in the dollar has done nothing more than peel back from some extremes to something more normal.

A wake-up call is pending for importers and consumers if history repeats and a period of undershoot follows.