New Zealand households are getting clobbered from many angles and are likely to circle the wagons to consolidate their financial positions.
With the majority of mortgages rolling over onto higher rates this year in response to the RBNZ’s assertive monetary tightening, rents are likely to rise in response.
Meanwhile, gasoline prices are at record levels and unemployment is likely to rise, so the outlook for consumption growth is gloomy. Even after incorporating the government’s newly introduced “working for families” benefit package, the downside for a minority of consumers is likely only to be cushioned. The increased benefits are being swamped by rising interest repayments and surging gasoline prices.
JPMorgan has analyzed how different groups of households will be affected by the combined impact of rising interest rates, high energy prices, and the introduction of the “working for families” package. The net impact on households varies with income, mortgage size, rent paid, and the number of children per household. The scenarios presented below apply to the average family in each income group, and do not take into account regional differences.
Working for families, not individuals
The new benefit package—with the measures effective from April 1, 2006—was designed to give greater assistance to most families.
The main features are:
• Increased family assistance eligibility, making the package available to more families with dependent children.
• Working parents can receive an in-work payment that replaces and pays more than the existing child tax credit.
• Families will be able to earn more income before their benefit payments are reduced.
The May 18 Budget delivered no surprises, but failed to deliver broad-based tax relief.
Only households with dependent children are affected by the new benefits. According to the government, 85,000 more families will receive benefits as a result of the fiscal package. This year, 350,000 families will receive assistance, but this will rise to around 360,000 in 2007.
Around three out of every four families with dependent children will be eligible for the extra family assistance. Note, however, that the majority of households— over 65% —do not have dependent children, and therefore will not receive any extra disposable income.
The more children the merrier
The table below highlights the net impact on the weekly household budget for a two-child household and for households without children, across various income brackets. Households with more than two children receive a greater increase in benefits, while households with only one dependent child receive less.
• Households without children but with mortgages are worse off at all levels of annual income, by an average NZ$61 per week because of the surge in gasoline prices and rise in interest rates. Lower income households are worse off as a proportion of income, as they spend a larger proportion of their income on automotive fuel than do higher income households, but the absolute spending increases with income (i.e., higher income households typically own more cars and are less dependent on public transport). Higher income groups tend to have smaller mortgages in proportion to income, so the impact of the rate rises has a more detrimental effect on lower income households.
• All households without children and that rent rather than service a mortgage are worse off, but to a much lesser extent because the lion’s share of the impact of the RBNZ’s monetary policy tightening hits households with mortgages.
• Households eligible for the full benefit of the new “working for families” package with two children and earning up to $65,000 per year are better off if renting and slightly worse off if holding a mortgage. Households earning above $65,000 per year are worse off because the benefits package fades out at higher income levels. Only eligible lower- to middle-class families with children rather than debt (no mortgage) are better off. The increased benefits to the majority of families with dependent children are being swamped by rising interest repayments, higher rents, and surging gasoline prices. Furthermore, the benefits only apply to a third of New Zealand’s households.
Consumption growth to hit the wall
The above analysis supports JPMorgan’s cautious outlook for the consumer. And there several other factors also pointing to tough times ahead:
• The unemployment rate was at a cyclical low of 3.6% in two of the past four quarters, but appears to have bottomed. Conditions in the labor market generally lag economic growth 9-12 months, and GDP growth started slowing midway through last year. The unemployment rate is therefore likely to rise throughout 2006 and 2007 as businesses adjust to sagging growth.
• According to the 2Q Westpac-McDermot Miller survey, consumer confidence fell in 2Q to its lowest level since 2000. Consumers’ assessment of their financial situation continued to deteriorate as rising gasoline and interest costs combined with a slowing economy. Optimism on longer-term economic prospects also fell. There are growing signs that consumers are cutting back on luxury items and the housing market shows signs of buckling.
• House price inflation is likely to turn to deflation in the second half of 2006, as fewer immigrants enter the market and higher interest rates bite. Falling house prices will have a negative impact on consumer demand as equity withdrawal dries up in response to diminishing wealth.
The above are key drivers of JPMorgan’s forecast of subpar GDP growth in 2006 as a whole of just 1.3%oya. An expected further decline in net permanent immigration, a deteriorating housing market, and crumbling consumer confidence are seen limiting the rebound in growth to just 1.8%oya in full-year 2007. JPMorgan’s economic growth forecasts factor in three consecutive quarters of falling consumption. Only those households with dependent children have a small cushion to fall on.
By Jarrod Kerr, economist, J.P. Morgan Securities Australia.*
