consumer confidence tumbled amid recession fears

New Zealand: consumer confidence tumbled amid recession fears

The Westpac McDermott-Miller consumer confidence index fell to 96.0 in 1Q09 (J.P.Morgan 97.0), from 101.3 in 4Q08. This was the second lowest reading on confidence since 1998. The lowest reading was in the June quarter last year, when the index slumped to 81.7. It was at this time that the RBNZ had left the official cash rate (OCR) at a record high 8.25% for 12 straight months, with Governor Bollard still citing upside risks to inflation.

We had anticipated that consumer confidence would fall in 1Q09 amid heightened anxiety about job security, the ongoing wealth destruction underway in the household sector, and widespread recession fears. This Friday, we expect New Zealand GDP to print at -0.9%q/q in 4Q08, marking the fourth straight quarter of negative GDP growth in this prolonged recession, which we expect will run for at least six straight quarters.

Indeed, on the employment front, the outlook has deteriorated rapidly. Firms increasingly are shedding human capital to cut costs as the recession deepens. In the most recent NBNZ survey of business confidence, 87% of respondents expected the unemployment rate to rise and 29% expected to shed workers in the coming year, reaffirming our expectation that the unemployment rate will to rise to 7% by year-end, from a five-year high of 4.6% at present.

Meanwhile, falling house prices, along with other asset price declines, have continued to cause massive wealth destruction in the highly leveraged household sector, where the debt to income ratio is 162%. In our view, house prices will continue to decline under still elevated (although lower) market interest rates and slowing net migration. The RBNZ forecasts house prices will fall around 20% by early 2010 from their 2007 peak, much in line with the 15% fall J.P.Morgan forecasts by end-2009, which will continue to dampen sentiment.

To some extent, lower interest rates (the OCR has been slashed 525bp since mid-2008), falling petrol prices, and the imminent personal tax cuts (due in April), probably prevented an even sharper fall in confidence in early 2009. The good news for consumers is that further official rate cuts are likely. The prolonged recession, alongside easing inflation pressures, sagging domestic house prices, and falling terms of trade, provide the RBNZ with plenty of scope to continue easing policy. Governor Bollard has signaled, however, that future rate cuts will be smaller than those recently delivered; thus, we look for 25bp rate cuts with the next two policy decisions in April and June.

Index
New Zealand: Westpac McDermott-Miller consumer confidence

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