When will NZ’s economy get better?: Matt Peek

There are dark clouds over the economy as well as winter approaching. Photo / Dean Purcell

Opinion

OPINION

Aotearoa New Zealand is known as the Land of the Long White Cloud, but with the country mired in an economic downturn, it feels like we have been (and continue to be) shrouded in a blanket of immovable grey rain clouds.

When will it get better? We have been keeping an eye out for the first green shoots, but are struggling to find many. It seems we have an economic winter to endure — as well as a seasonal one — before things are likely to improve. We may even need to wait until spring to see those proverbial green shoots.

For listed companies, February’s reporting season was a collective improvement from the sea of red ink last August. Back then, by our assessment, analysts cut their expectations for company performance more broadly than they have at any point in at least the past 20 years. The most recent round of updates in February and March was “less bad”, but on balance the forward outlook for earnings was again ratcheted lower.

Of course there are bright spots. Some high-quality growth companies continue to perform well, especially those with more of an offshore focus. Fisher & Paykel Healthcare is a good example, continuing to grow and deliver underlying performance that has exceeded expectations. Such outperformers were outnumbered by locally focused businesses such as The Warehouse and Fletcher Building that are struggling.

While there is the sense we are now further through the downturn, we are yet to see the light at the end of the tunnel. Sequentially, key economic data points appear to be weakening. We ended 2023 officially in recession. Companies tapping into discretionary consumer spend are seeing particularly subdued demand.

Retail sales volumes melted away by 4 per cent in the December quarter versus a year ago, for the eighth quarter in a row, with almost every category going backwards. This was despite net migration of 126,000 in 2023 that added about 2.5 per cent to the population.

It is easy to see why Kiwis are keeping their wallets in their pockets. The two-year mortgage rate is now about 6.75 per cent versus 4.75 per cent two years ago. Homeowners are still refinancing mortgages on to much higher rates, which is draining discretionary spending.

This is likely to continue through 2024, despite rates beginning to moderate. Unlike Australia, where house prices are mostly back near highs, our house prices are significantly down from their peaks of late 2021, so homeowners are feeling less wealthy. Australian consumer spend has consequently held up much better than in New Zealand.

In this environment we are finding out which cyclical companies are punching above their weight. Courier operator Freightways, which reflects both business and consumer activity levels, has seen same-customer volumes running down 5 per cent on a year ago (on an increasingly weak comparison).

However, it has been able to take share from competitors based on its consistency of service and tap into new parcels from the shopping website Temu to see slight volume growth.

All companies, even those with more defensive revenues, have been subject to ongoing cost pressures that have squeezed profits. Insurance and rates are two particular pain points at present, plus higher interest costs.

Some other financial constraints such as international freight have improved, but these are the exception. Wage pressures have moderated after a period of significant hikes in the minimum wage, while the extremely tight labour market is loosening at the edges. High-profile cuts in the public sector may soften the labour market further and limit salary increases.

However, that could be a double-edged sword for businesses because it could mean another hit for consumer spending, especially in Wellington.

Ultimately, the force that looks set to ease the hardship is the same one that caused it in the first place: inflationary pressures, which are slowly but surely easing. NZIER’s recent quarterly survey of business opinion shows companies’ appetite to raise prices has reduced to the lowest level since early 2021, suggesting inflation will continue heading towards the Reserve Bank of New Zealand’s target level. This will bring interest rate cuts back on the table, and will come as a relief to many.

So far, the RBNZ has appeared less willing than its offshore counterparts to consider the economic outlook in its battle to subdue inflation, despite a more troubled domestic economy. Just how much and when rates are cut and what impact it has on the economy remain to be seen, but at least it would represent a positive turning point.

The sharemarket is not the economy, but it is clear the local economic landscape is one key reason the New Zealand market has underperformed other markets recently. Over the 12 months to March 31, the S&P/NZX 50 benchmark delivered about 2 per cent total return, versus the US S&P 500 returning 30 per cent and Australia’s S&P/ASX 200 returning 14 per cent.

The sharemarket is also forward looking. Some of the highest-quality cyclical companies have begun to reflect a sense that we are at or close to the bottom and the next move will be up. In the March quarter, Freightways delivered a 6 per cent return and well-run steel distributor Vulcan was up 12 per cent.

Leading retirement village operator Summerset returned 13 per cent despite the subdued housing market, although it has notably outperformed other operators that have struggled with market conditions.

Now we just need to wait patiently for the green shoots needed for a more broad-based recovery.

Matt Peek is portfolio manager for Fisher Funds’ actively managed New Zealand equities strategies.