Practicalities get in the way of exuberance

A mood which might be summed up as ‘let’s not get carried away here’ seems to have overtaken New Zealand consumers.

The latest Westpac Bank/McDermott Miller consumer confidence survey shows a pullback in optimism. The survey actually peaked in September last year, and since then has been declining.

The survey is still in positive territory – the index figure is 114.7; and was 116.9 last months. The September peak was 120.3. Anything above 100 is positive, on the index.

How this slow slide might be interpreted is a difficult question. The survey is one of the economy’s “leading indicators” – the September peak was certainly ahead of other signs the economy was emerging from recession.

The question is whether the slow slide portends an economy slipping back into recession.

Much of the bad economic news since the end of last year has been consumer related, while the better economic signs have been export and business-related.

Probably the news affecting consumer mood the most is the continued rise in unemployment. This, unlike mood surveys such as this one, is a “lagging” indicator – unemployment is usually the last thing to deteriorate in a recession, and the last thing to recover when a downturn is over.

On top of that, bank interest rates have effectively risen over recent months, and the housing market has slowed down again after a spring surge.

Economists – and government ministers – have emphasised the need for New Zealand’s economy to “rebalance” after the excesses of the 2004-07 debt fuelled boom, and that this requires any recovery to be export-led.

There’s a downside to that, although government ministers, and some economists, tend to just whisper this.

The downside is it means a period of financial quietude from consumers.

That is, household balance sheets need to be restored, debt needs to be repaid, and there has to be less appetite for borrowing and spending.

There are signs outside this survey that this is happening. Recent retail spending figures show only a slow recovery in that part of the economy, and what there is appears driven by lower prices for imports because of the high New Zealand dollar. Recent electronic transactions and credit card figures show New Zealanders are paying off their credit card debts and are not replacing it with more spending.

The next question in this area is whether the expected increase in GST, yet to be confirmed but all but certain, will cause a bow-wave of consumer spending ahead of the change.

And whether, once that bow-wave has passed through, there will be a long period of flat consumer spending.

Meanwhile, an interesting signal came  from the  New Zealand Energy Outlook, published today by the Ministry of Economic Development.

It found a 5% rise in diesel demand in the December quarter from a year earlier could indicate a rebounding economy.

It said diesel demand rose to 27.5 petajoules (Pj) in the December quarter from 26.2 a year earlier. Petrol demand was up 2 percent to 28.8Pj.

"This diesel demand increase may well indicate a significant rebound in economic activity as it follows two quarters where consumption was well below the previous year's level," the report said.