Electronic card transactions in NZ increased 2.1% over the last 12 months, surging 7% in April alone. Source: Statistics New Zealand
When I first started writing this blog, I read the above, and it fit my narrative. I thought I would stumble on increasing balances on credit cards reflective of tightening budgets in households, fuelled by rising debt costs and higher living costs, which lead to people needing to borrow to buy.
Looking deeper, that doesn’t appear to be the case. The RBNZ has released data that shows credit card debt in NZ has fallen from a high of ~$6.9bn in Feb 2020 to ~$5.5bn in Feb 2022. That is a 20% fall in credit card debt! (Pat on the back NZ!). Looking back over the last 6 months, it also doesn’t appear that this trend has reversed, with credit card debt sitting at ~$5.95bn in Feb 2021, and consistently falling over the last 12 months.
My thesis, as frequent readers will know, is that we will continue to see high levels of inflation as we consistently fall short of real interest rates. See my previous blogs on this topic here, A Cash Hole and Lateral Partner’s view on the current lending environment.
Despite this, the increasing cost of debt will squeeze households, and I think we will end up in a recession (if we aren’t already in one) before the end of the year. I believe the RBNZ will respond to that (possibly under political pressure in an election year) and seek to provide stimulus to the economy toward the end of this year or early next year. I expect that the stimulus will manifest in not just falling interest rates, but perhaps loosening of credit policies (LVR thresholds).
The data doesn’t necessarily support that line of thought, however, with consumer spending up and credit card debt down. Could I be so far off the mark?
Consumer confidence is exceptionally pessimistic- April’s Roy Morgan survey from ANZ shows it as low as 84.4 in April (that is lower than March 2020….). Almost everyone I speak to is worried about interest rates, the housing market and NZ’s economic state. Most come to the same conclusion, the Reserve Bank can’t continue to lift interest rates, it would be catastrophic on too many households.
A mere 14 years ago (June 2008) the OCR was 8.25%. Inflation back then was 5.1% and the economy was overheating before the GFC. Inflation is currently at 6.9%. The current OCR is 1.50%.
We weren’t screaming blue murder 14 years ago…what has changed?
Quite simply, we have expanded both our public and private balance sheets enormously. With that has come the expansion of the money supply (furthered even more by Grant Robertson last week pumping another $850M directly into people’s pockets) which has led to inflation. Combating inflation has never been harder as the balloon is bigger and harder to deflate.
We are at a point now where a lift of interest rates to a meaningful level (above the rate of inflation) is exceptionally risky and unpalatable for both the government and reserve bank. The conclusion? Continued inflation and stimulus for the near future.
Watch this space.
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