There is a term in economics called the precautionary saving motive. This refers to the point at which enough trouble is imminent that consumers begin to hold on to cash just in case.
ANZ chief economist Sharon Zollner said New Zealand is not yet at that stage despite repeated warnings from the Reserve Bank of a looming recession, and said it will take steps to deal with inflation as needed. He also said he would create a slowdown in the economy.
“The Reserve Bank has done its best to surprise people, make them a little nervous, save more and spend less, but so far it has seen limited traction,” she said.
High inflation, on the other hand, did not solve inflation, Zorner said.
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“All you’re going to get is higher wage inflation. If inflation solved inflation, there wouldn’t be a 1970s,” she said.
“Inflation is nasty, but it’s no reason not to spend all your money.”
Infometrics principal economist Brad Olsen agreed that New Zealanders haven’t changed their habits yet, even though most people know the cliff is coming.
He said there was a disconnect between recent consumer confidence surveys and spending data, which all showed households were feeling the bleak outlook.
“You look at spending activity and have a pretty hard time finding those negative sentiments.”
Data released last week showed spending up 8.6% year-on-year, outpacing inflation and suggesting New Zealanders are still spending more.
“I think there’s an element of people knowing it’s coming, but you don’t necessarily have to make big adjustments until it happens.”
He said the preventative savings motivation is only triggered when most Kiwis are “already in a lot of pain.”
Lawrence Smith/Staff
ANZ chief economist Sharon Zollner said the country could end up in a 1988 situation if the Reserve Bank failed to tackle inflation.
Zorner said people were upset by the Reserve Bank’s 0.75% hike in the official cash rate (OCR) before Christmas, but they returned to spending in January and February.
“It’s like people leave their homes at Christmas and forget they’re scared,” she said.
Banks raised the OCR by 0.5% last week. This is a bigger lift than most economists predicted.
Zolner said the decision proved that inflation was top of the bank’s priority list.
She said rising mortgage rates have taken more money out of some people’s pockets, which has had a knock-on effect on some consumers’ spending, but most still continue to spend. I am satisfied with that.
As the precautionary saving incentive becomes operational, it will be felt throughout the economy.
“People’s decisions about whether they need to set aside something for rainy days can also have a big impact on the economy,” said Zorner.
Payment/Payment
Brad Olsen said the Reserve Bank’s decision to make the February OCR hike smaller than expected may have hurt the long-term outlook.
“Consumption tends to be very smooth compared to things like capital investment and exports that are all over the place, but it’s huge, more than half of GDP, so when it moves, it has a big impact.”
The wage-price spiral, in which workers demand higher wages to keep up with the cost of living, which costs suppliers, and results in rising prices, is the “detour” the Reserve Bank was trying to get the economy back on track. , said Zorner. .
Wage prices have resulted in everyone becoming poorer as savings and reserves are devalued – Zollner points to a point made by Reserve Bank chief economist Paul Conway in a recent speech. bottom.
“That’s a valid statement, but I’m not sure about the power of speech to change people’s decisions.
After all, people have very strong incentives to react to the incentives in front of them, extract every dollar they can from their employers, and push prices up to keep others profitable. increase. “
Solner said while the Reserve Bank’s actions are hastening the economic slowdown, the country will always slow down.
“This economy moves super fast and we have been living beyond our means for too long.”
“In fact, our current account deficit has blown to nearly 9% of GDP, and at some point the world will look at us and say, ‘We’re not funding any more.’ Adjustments will happen anyway.It will be more brutal.”
“Gravity is inevitable”
Zorner said the Reserve Bank was starting to gain momentum and it could take some time between changes in monetary policy and their effects.
Olsen said his answer to a friend who asked him if he should start saving now was yes.
“I have said this privately to people I know and publicly to anyone who has interviewed me.
“The best time to do it was yesterday, and the second best time is today.”
