9 December 2020

Pessimism and positivity in New Zealand’s economic outlook

The economic ramifications of restrictions of movement and lockdowns as a response to Covid-19 has been unprecedented. While the outlook for the economy remains uncertain, a clearer picture of the impact Covid-19 has had during recent months is emerging. 

Data from IBISWorld and Statistics New Zealand suggests that household consumption expenditure is forecast to decline by 8.5% in 2020-21 (to a total of $142.6 billion), representing the first decline in household consumption since the height of the global financial crisis of 2008-09.

With all non-essential business in New Zealand effectively closed for over a month during March and April 2020, the country experienced a sharp increase in the national unemployment rate. Consumer sentiment has fallen due to a decline in household disposable income and overall economic uncertainty.

However, stimulus packages aimed at supporting individuals and businesses, as well as the reduction in the Reserve Bank of New Zealand's official cash rate to 0.25% in March 2020 may result in a more limited decline.

Disposable income and population growth are the two main factors that determine long-term household consumption expenditure. In general, immigration boosts household consumption expenditure as new residents purchase goods and services for basic needs. Border limitations and the knock-on effect to migration could have a lasting impact.

Through 2019-20, the unemployment rate had been in decline, accompanied by a rise in real household disposable income. In addition, the cash rate lowered over the period, reducing the general level of interest payments in New Zealand.

Consequently, these trends were leading to increased income being available to individuals and boosting their purchasing power over the past five years.

Should Covid-19 restrictions be fully lifted by mid-2021, this should support the gradual recovery in household disposable income and a decline in the national unemployment rate in 2021-22, resulting in a forecast household spend increase of 7.9% in 2021-22, to a total of $153.8 billion.

On the topic of spending, within the retail sector several emerging or increasing trends have been noted during 2020.

Big winners during the Covid-19 lockdown were homeware, hardware and liquor retailers, while clothing retailers, restaurants and takeaway bars suffered declines in revenue (although food delivery services surged).

Demand for freight services declined overall, due to falls in international trade and volatile domestic demand. Although a distinct increase in online retail trade brought about by the COVID-19 lockdown has partially offset this decline.

While online retailers were well-placed to benefit from the increases in web traffic and activity, such organisations have still been forced to modify their offerings to consumers. Loyalty programmes, analytics and customer profiling which result in a more personalised service, and ongoing communication with customers (after-sales service) have become necessary components of online retail, over and above the simple convenience of click-to-purchase. 

The positive news for e-commerce retailers is that the substantial shift online by consumers looks set to remain and increase in the years ahead. Inevitably, it is expected that online retail’s share of total expenditure will drop post-Covid, but not to pre-outbreak levels.

And while ‘word of mouth’ is no longer literal, reports indicate that positive referrals remain one of the most powerful drivers of business demand, although digital advertising click-through rates also increased slightly during the Covid-19 lockdown.

Overall, consumer sentiment has been described as ‘heavily cautious’, but so far 2020’s combined retail data doesn’t fully reflect this pessimistic outlook.

Sources: IBISWorld, Statistics New Zealand (Tatauranga Aotearoa)