New Zealanders are not happy about the surging cost of living and having some of the highest cash rates in the western world, but they are still spending money.
Indeed the nation should be seen as a test case to show that an economy can adapt to the painful path of a soaring cost of money. That’s the assessment of ANZ chief executive Shayne Elliott, who operates the biggest bank in New Zealand.
Speaking to The Australian in Auckland*, Elliott says the same conversations around the impacts of cash rate moves are being held in New Zealand boardrooms as in Australia — but New Zealand is much further down the path in taking its inflation medicine.
The Reserve Bank of New Zealand was the first central bank in the world to sniff the inflation storm that was about to hit and started aggressively tightening from October last year. It has since been on a forceful tightening circuit, with the cash rate currently sitting at 3 per cent and on a trajectory towards 4 per cent.
As a comparison the Reserve Bank of Australia issued its first cash rate hike in May this year and even then it was a gentle tap of 25 basis points, taking Australia’s cash rate to 0.35 per cent. That same month New Zealanders were already sitting at 1.75 per cent. Australia remains a long way behind with a cash rate on Tuesday expected to move to 2.35 per cent, while economists now believe Australian rates will also peak at 4 per cent.
Elliott’s comments come after Prime Minister Anthony Albanese on Monday doubled down on his warning for the RBA, in raising rates, to be mindful of the impact of on everyday Australians.
Still, Elliott who grew up in Auckland, says all the economic data shows ANZ’s New Zealand customers are “coping” by keeping up with payments and there are few signs of defaults rising among households or business.
“It shows there’s a certain level of robustness in the system, which is pretty remarkable,” he says.
House prices in New Zealand have fallen around 10 per cent from their peak, but after running up 50 per cent in the past three years — faster than Sydney or Melbourne — the median house price in Auckland, the nation’s biggest city is still above $NZ1.1m ($990,000).
Growth in home lending has stalled, but that’s expected as prices ease.
As New Zealand’s biggest lender, ANZ has a good read on that economy. The Melbourne-headquartered bank has a one-third share of the banking market — helped by its National Bank of New Zealand acquisition — and ranks as one of the biggest companies and employers operating there.
The one key difference is that around 80 per cent of mortgages are fixed in New Zealand (most between one and two years), which means the full shock of higher interest rates is yet to hit some households.
But costs have been surging in other areas, including fuel, which is in Australian dollar terms has been priced above $3 a litre. Elsewhere food prices have been soaring, with a standard block of cheese passing $20 a kilogram.
Elliott says given the New Zealand economy is narrower than Australia’s, with agribusiness representing the bulk of exports, it is more vulnerable to a shift in the cycle. He describes the country as often reflecting an “extreme version” of Australia — with labour shortages more acute, particularly for skilled workers and house prices more volatile. Inflation is running above 7 per cent, compared to 6 per cent in Australia, while New Zealand wages are surging.
Despite that, households on both sides of the Tasman “are in really good shape”.
“And that’s partly why rates have been rising so fast,” he says. “I mean, we’ve never seen a cycle like this, where rates have risen so quickly, particularly relative to the starting point, which is zero”.
The lesson from the New Zealand experience is that “economies can handle it”.
“That doesn’t mean that there won’t be some casualties on the fringe and there will be, but it’s not like a broad brush or sledgehammer”.
The ANZ boss says he looks at his bank’s real time balance sheet every day and it shows that in Australia conditions are still good. Retail deposits, which have been sitting near record highs coming out of Covid-19, are only just started falling. Small business deposits have been volatile but it is clear funds are being used to build up stock levels.
“If people were really stressed they’d be pulling down deposits to spend, or starting to blow out their overdraft. “There’s still lots of resilient strength in the economy … the fact that people want to hire people is the strongest sign of robustness.”
ANZ’s NZ chief executive Antonia Watson, meanwhile, says she is an optimist on the country’s position despite the rate surge. Any talk of a recession is a long way off, but a lack of labour has clearly been hurting growth.
“Spending has just has started coming back a little bit in the last numbers. I mean, we are seeing a lot of grumpy people, but they are spending, but just at a slower rate. Which is positive, because that’s what we want to happen by hopefully putting a dampener on inflation,” she says.
One area set to benefit New Zealand in the long run is the chronic labour shortage, which is forcing the economy to be more productive. While the border has opened again for migration, Australia’s similarly tight labour market is also sucking in workers from across the Tasman. That means New Zealand is suffering from negative net migration just as unemployment hits a record low of 3.3 per cent.
“The thing that worries every single person you talk to is labour supply,” Watson says. “And in the long run we don’t want to have to rely on imported labour to do everything. It’s just, how do we transition to that? There’s no question we need to be more productive.
“We’re certainly seeing a little bit more of that. And again, things don’t change quickly, but there’s a bit more momentum in the business lending space.”
This, she says, is the early sign that business – from farms to manufacturing – is moving to automation to solve the labour crunch.
*The author travelled to New Zealand as a guest of ANZ
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