Consumer confidence slips in second quarter on lower dairy prices, higher interest rates

Felix Delbruck, senior economist at Westpac Banking Corp

New Zealand consumer confidence fell in the second quarter as lower dairy prices and higher interest rates weighed on sentiment.

The Westpac McDermott Miller Consumer Confidence Index slid to 121.2 in the June quarter, from a nine-year high of 121.7 in the March survey. A reading above 100 indicates more optimists than pessimists.

The drop in confidence was most noticeable in smaller urban centres and rural areas, which would have been most affected by a drop in global dairy prices. A net 31 percent of those polled expect good times ahead for the economy over the year ahead, down from a net 35 percent in the March quarter and the first decline since the September 2013 quarter. Optimism about the next five years slipped below the historical average to a net 30.1 percent from 31.8 percent in the March quarter.

"Consumer confidence remains extremely high," Westpac Banking Corp senior economist Felix Delbruck said in a note. "Given the recent drop in dairy prices and the fact that the Reserve Bank has started raising interest rates, it's perhaps surprising that confidence hasn't fallen more."

The survey was taken June 1-10, before the Reserve Bank raised the benchmark interest rate by 25 basis points to 3.25 percent on June 12, the third increase this year. There was little sign in the survey that rising interest rates were prompting a greater desire to save or pay down debt, with the number of people saying they would invest a windfall in savings or use it for debt repayment at a 15-year low.

The net balance of households saying it is a good time to buy a major household item rose for a third consecutive quarter to 31.5 percent from 28.3 percent and when asked what they would do with a cash windfall, more people said they would use it to go on a holiday, suggesting bargain-hunting by consumers lured by the continued drawcard of cheap imported goods and overseas trips.

"Today's survey gives little sense that rising interest rates have dampened spending appetites," Delbruck said. "Consumers' attitudes towards their own finances are little changed since early March and they seem to have become less focused on saving and paying down debt.

"This may reflect the fact that borrowers have recently had the opportunity to fix their mortgages at favourable rates," he said. "The Reserve Bank will be taking note and feeling validated in its decision to signal more rate hikes to come."

New Zealand's central bank is expected to deliver another two rate rises this year, according to a Reuters poll of economists taken after last week's rate increase. Nine of 13 economists expect the next rise to come in July.

(BusinessDesk)

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