MNI INTERVIEW1:RBNZ's Conway Sees Progress In Cooling Spending

The 0.6% q/q fall in New Zealand's fourth quarter retail sales reported on Monday was "consistent" with the Reserve Bank of New Zealand's fight to steer inflation back to its 1-3% inflation target, though it could pose downside risks to the central bank's Q4 GDP forecast, RBNZ chief economist Paul Conway told MNI.

"I think it's definitely consistent with some cooling jets, or luke-warm jets," Conway said in an interview, referring to Governor Adrian Orr's call in November for New Zealanders to "cool their jets" on spending as it was complicating the fight against inflation.

"That's sort of the first partial read on Q4 GDP, so there's some downside risk around Q4 GDP there. I think we're sitting on 0.7% growth, so that could be a bit lower. But the data is all over the place and retail sales haven't been giving us a particularly good steer on GDP over the past few quarters."

Conway, who will mark his first anniversary as chief economist in May, is sharpening the bank's research agenda to better understand the changing dynamics of New Zealand's economy, which has been struck by numerous supply-side challenges, the most recent being devastation caused by Cyclone Gabrielle earlier this month.

The RBNZ warned of a short-term spike in some prices, such as for food and furnishings, in February's Monetary Policy Statement, but has yet to get a proper grasp of the impact on both inflation and growth.

"We'll have a better understanding of the effects of the cyclone on inflation once we understand the full extent of the destruction. We're getting there, we're learning more day by day," he said.

The RBNZ had forecast a slowdown in construction, but Conway says the need to rebuild in the northern parts of the country's North Island could alter the outlook. "The rebuild after the cyclone, obviously the construction sector is going to be front and centre of that. So that slowdown, it could change in some ways," he said.

JOBS, HOUSEHOLDS

Consumption is expected to decline on a per capita basis and trough at above pre-pandemic levels in 2024 under pressure from higher rates, elevated inflation, and the impact of falling house prices on wealth. The RBNZ has delivered 450bps of cumulative tightening since October 2021.

"Consumption per capita has been pretty strong coming out of the pandemic, or coming through the pandemic. It's still going to be higher than it was pre-pandemic," Conway said.

While the housing market has weakened significantly, the potential for further pain was highlighted last week by Assistant Governor Karen Silk who warned borrowers could be spending up to 22% of disposable income on servicing mortgages, up from 9%, as they are repriced higher. (See MNI BRIEF: RBNZ Warns Mortgages To Sap 22% of Disposable Income)

"If you look over the history of that time series, we've been here before. Overall, we know that household balance sheets are still in pretty good shape," Conway said.

"The labor market is incredibly strong. Wage growth is strong. Overall households are in good shape, but they are bearing a lot of the burden of the adjustments that are required to get inflation down."

RBNZ research shows job-to-job transitions are helping drive wages growth, though that may come under pressure.

"It's well correlated with our measures of the output gap, suggesting that there are demand side factors at play there," Conway said. "If that is the case, then you would expect that job-to-job transition rate to fall as the economy cools over the coming quarters."