High petrol prices hit home but light on the horizon
New Zealanders feel the pinch as financial pressures continue to mount.
Retailers face a challenging environment as discretionary spending is slashed.
Interest and tax cuts provide some welcome light.
The relentless rise of petrol and food prices are biting hard and the New Zealand economy is now tipping into recession, according to the latest ASB Quarterly Forecast.
Over the past five months, petrol prices have climbed rapidly, at one stage setting a new record at $2.19/litre in urban areas. While prices have since eased slightly, the cost of basic food items are still increasing sharply and higher mortgage rates have contributed to the housing market downturn.
Total retail spending growth has essentially stalled on the back of the rising cost of essentials. This combination of higher mortgage rates, rising petrol and food prices, falling house values and the prospect of lower wage increases, has meant New Zealanders’ confidence in the economy has taken a battering, with some consumers now struggling to stay on the road.
“While the economy is effectively in a household-led recession, and ripple effects will continue to be felt during the second half of this year, the good news is that even as the economy is weakening, the seeds are already being sown for a gradual recovery,” says ASB’s Managing Director, Hugh Burrett.
“The run of finance company collapses have had far-reaching consequences for many New Zealanders, but ASB has a strong balance sheet and good funding lines in place.
“Like our parent bank, CBA, we have no direct exposure to the US sub-prime mortgage market or related collateralised debt obligations (CDOs). ASB is fortunate to be in the position to be able to fund well over half of its lending from local savings and investments. We have also recently entered into two long term debt issues in New Zealand and supplemented these with two other long term issues in the international markets, putting ASB in a strong position to continue to support the quality lending that is required by our customers,” says Mr Burrett.
“As the economy emerges out of a benign credit cycle, increases in debt provisions are inevitable, but in ASB’s case any losses are expected to remain relatively low.”
With lower mortgage interest rates underway and tax cuts filtering through after October 1st, both providing some much-needed and long anticipated relief for New Zealand households, by mid-2009 the New Zealand economy should be climbing out of the current lull. The housing market will be back on the road to recovery and improved business confidence should see the labour market firm up. Added to this, soaring dairy incomes have already started to have a positive impact.
One of the crucial elements of recovery has officially arrived, with the Reserve Bank of New Zealand cutting the Official Cash Rate down to 8% last week. ASB immediately led the market down, reducing its popular two year fixed home lending rate back to under 9%.
“This is a sign of things to come, the Reserve Bank having already announced it expects to further cut the OCR this calendar year,” says Mr Burrett.
Released by ASB Corporate Communications.