Consumer confidence at lowest-ever level in Westpac survey as cost of living bites

  • 19/12/2022

Consumer confidence has taken another dramatic tumble in the latest Westpac survey, falling to its lowest level on record following dark economic projections for 2023.

The Westpac McDermott Miller Consumer Confidence Index took a 12-point hit in the December quarter to 75.6, far below the confidence threshold of 100.

This is the lowest consumer confidence has been on this survey since it began in 1988. Confidence among households has only ever been close to this low during the recession of the early 1990s and during the 2008/09 Global Financial Crisis.

The number of households which believe it is the right time to make a major purchase has also fallen to a record low. That follows a message from the Reserve Bank for Kiwis to be careful with their spending this Christmas.

The report found increasing numbers of households have found their financial position has deteriorated over the past year and a majority expect it to continue to worsen into next year.

The main points are:

  • Consumer confidence has fallen sharply heading into the holiday season, dropping to its lowest level on record
  • Mounting financial pressures are the major concern that is worrying households. Living costs have been skyrocketing. We’ve also seen sharp increases in borrowing costs
  • The weakness in consumer confidence is weighing on household spending appetites, reinforcing our expectations for a slowdown in overall economic growth
  • The drop in confidence has been widespread across all age groups, income brackets and regions.

The financial pain is coming on a number of fronts, according to the survey report, including a sharp rise in consumer prices.

"The past year has seen particularly large increases in housing costs (up 9 percent) and petrol prices (up 19 percent), while food price inflation hit a 14-year high of 11 percent in November.

"Those price increases are being felt by every family across the country. They’ve been particularly tough on those families on lower incomes, who tend to spend a larger share of their earnings on necessities."

The Reserve Bank's response to lift the official cash rate (OCR) by 400 points since October last year - including a record 75 basis point jump in November - has resulted in a large rise in mortgage rates.

The RBNZ hikes the OCR to increase interest rates in the hope of bringing consumer spending and borrowing down and therefore take demand out of the economy. When there is reduced demand, there is less pressure on supply, meaning there isn't as much pressure on prices to increase. 

However, the jump in mortgage rates can create pain for homeowners.

"Most New Zealand mortgages are on fixed rates, and many borrowers are still on the very low rates that were on offer in the early stages of the pandemic. However, that picture will change dramatically over the coming year."

Westpac said nearly half of all mortgages are expected to come up for repricing in the next 12 months, meaning they will be repriced at much higher rates.

"For example, borrowers who fixed for two years in 2020 may have secured a rate in the 2.5 percent to 3 percent range. Those same borrowers are now looking at a two-year rate that’s more than 3 percentage points above what it was back then."

There's also the additional concern for homeowners of falling house prices, with prices dropping on average by 14 percent nationally since November last year.

"With interest rates continuing to push higher, we’re forecasting that nationwide house prices will continue to fall over 2023. And with New Zealanders holding a large amount of their wealth in owner occupied or investor housing, the fall in prices now in train represents a sizeable knock to many households’ net worth." 

A financial stability report from the RBNZ in November found the number of home loan borrowers in negative equity could jump from 2 percent to 7.3 percent if house prices fall another 10 percent. Negative equity means the borrower's mortgage is larger than the current market valure of their property.

The survey period of between December 1 and December 12 follows the Reserve Bank's dire November Monetary Policy Statement (MPS) which forecast inflation to continue to rise to 7.5 percent in early 2023. 

As a result of that increasing cost of living, Governor Adrian Orr admitted the central bank is hiking the OCR to purposefully engineer a recession.

Orr warned Kiwis to be prudent with their spending this Christmas. It appears that message has got through, with the Westpac survey finding the number of households who believe it is a good time to make a major purchase has fallen to a record low. Households have also scaled back their spending on leisure activities.

"Those subdued spending appetites point to some soggy spending numbers over the Christmas shopping period," the Westpac survey says. "Importantly, we expect that spending will continue to weaken over the year ahead as borrowing costs push higher and the pressure on households’ finances builds."

The survey found confidence has dropped across all age groups and income brackets. It's also dropped across all regions, except Otago which is benefitting from the return of international tourists. 

"The past few months have seen particularly sharp falls in the Waikato and Wellington. Those are regions where confidence had been holding up, supported by factors such as the strong labour market and, in the case of the Waikato, firm export prices.

"However, the earlier optimism in these regions has now faded. All households are now feeling the squeeze from increases in the cost of living and rising interest rates."

Treasury's Half Yearly Economic and Fiscal Update (HYEFU) last week projected three-quarters of negative growth next year. That will result in unemployment jumping from its near-record low of 3.3 percent in September this year to 5.5 percent in 2024.