In an election year, a useful economic indicator of how Kiwis are feeling is consumer spending.

Since the June quarter last year it has been growing strongly. How sustainable is that trend? Has the wealth effect finally arrived, and if so, will it stay?

The Reserve Bank is essentially shrugging its shoulders. Its monetary policy statement last week revised up the forecast track for private consumption, but still has the rate of growth slowing - to a somewhat faster pace than between 2012 and 2015, but slightly weaker than longer-term historical relationships with house prices and incomes might suggest.

However it is a key area of uncertainty, the bank says, with both upside and downside risks.


In the year ended last September - the most recent for which we have national accounts -household consumption expenditure rose 5.5 per cent in real terms.

Population growth over the same period is estimated at 2.1 per cent, implying real per capita spending growth of 3.4 per cent. That is well above any plausible estimate of real per capita income growth.

It is also well above the average 1.2 per cent per annum growth rate in real per capita consumption that we have seen since 2008. Not only was 1.2 per cent modest by long-term historical standards, it also occurred during a period of runaway house price inflation - or, as its beneficiaries prefer to think of it, gratifying rates of capital gain.

In a speech last November, deputy governor Geoff Bascand reflected on the weakness of the wealth effect in the latest cycle. Consumption had not been turbocharged relative to income growth as it was in the mid-2000s boom, by owner-occupier households spending a few cents in the dollar of their rising housing equity.

"Given the wealth effect, you might have expected people to consume more than they did," Bascand told the Herald last week.

"We put that down to people being cautious post the global financial crisis. They wanted to see debt levels consolidate a bit. If you look at where the saving was going on, it seemed to be mostly from the most indebted households," he says.

"The question now, after two quarters of very strong consumption growth, is whether that is a temporary aberration or have households done the debt reduction and are going back to their old ways?"

The answer to that question will depend partly on whether the recent signs of a cooling housing market mark a turning point or just a pause.

And the sustained strength of the net migration gain over the past three years has surprised the Reserve Bank forecasters (and, to be fair, other forecasters as well).

"Immigration generally is a good thing but too much of it causes indigestion problems," Bascand says.

One factor that had weighed on consumption, especially in some rural regions, was the collapse in dairy prices. They have subsequently recovered somewhat.

"For the moment we are assuming people are going to discount the commodity price increases and some of the house price [gains]. It is going to be solid consumption growth, a little bit better than it has been over the past few years but not a return to the old days of big housing equity withdrawal and credit growth way ahead of income."

The Reserve Bank's forecasts have the household saving rate staying in the red for the next couple of years.

"We saw negative household savings of around 8 per cent [of disposable income] back in the mid-2000s. It is somewhere around minus 1 per cent now so it does seem to have come back from a really dire dis-saving situation to a still somewhat modest rate." And the Government's accounts represent some public saving to partially offset the improvidence of the household sector.

But we do bear the consequences of that dis-saving in terms of a perpetually higher real exchange rate, Bascand says.

"There is a risk premium and interest rates are higher to attract the [foreign] capital to fund our dis-saving. So New Zealanders face a higher cost of capital. That hinders business investment and ultimately productivity because you have less capital per worker." Business investment in the September quarter was just 1 per cent higher than in the same period a year earlier. Spending on plant, machinery and equipment was down.

It may be that investment is better than the official data indicated, if the statisticians are getting the price adjustment wrong, says Bascand, the former Government Statistician.

"This far into the growth cycle we would have expected to see a bit stronger business investment than we have. It is not dire. It is moderate. And if you look at total investment, ours has held up better than other advanced economies."

So if consumption growth is surprisingly strong and investment growth maybe better than it looks, what is there to worry about in the outlook?

"Potential disruption from the international economy," Bascand says. Geopolitical uncertainty is high and a potential shock would impact us through various channels: trade flows, confidence and financial markets.

"The short-term outlook for the global economy looks reasonable. It is the medium term that is uncertain."

Thinking about top job

Geoff Bascand is undecided whether he will be a candidate for the Reserve Bank's top job when it becomes available in a year's time.

He is the more senior of the two potential internal candidates in speculative contention - the other is chief economist and assistant governor John McDermott - and as a former head of Statistics NZ he has public sector chief executive experience.

"I will think deeply about it and come to a decision when the time comes. So I haven't dismissed it," he says.