Rising inflation expectations and growing pessimism over future economic performance have severely weakened consumer sentiment
B2C firms should actively reappraise their customer base, as prioritizing resilient segments of demand will be crucial to meeting targets. Companies should focus their sales and marketing efforts on high-income consumers, who spend a smaller portion of their income on food and housing. Targeting on-trade services and tourist hubs will also be a winning strategy on the back of New Zealand’s reopening and tourism revival.
Overview
Consumer confidence, as measured by the Westpac McDermott Miller index, dropped by 13.4 points to an all-time low of 78.7 points in Q2 2022. Overall confidence levels fell due to rising prices, tightening interest rates, and households’ growing pessimism around future economic prospects. The reading indicates that consumers are highly pessimistic, as it is well below any level seen in more than a decade.
Our View
The recent drop in New Zealand’s consumer confidence is almost entirely driven by intense inflationary pressure. It is no coincidence that sentiment has fallen to an all-time low when CPI growth is at a 30-year high of 7%. Households in New Zealand are particularly vulnerable to current inflationary dynamics, as 57.7% of average household expenditure is used for food, housing, and transportation.
In addition to inflation, rising interest rates and pessimism around future economic prospects are also weighing on household sentiment. Interest rate hikes are dealing a double blow to households in the form of higher mortgage payments and lower house prices. Not only are Kiwis paying more in interest payments on their homes, but the value of their homes is also falling as rising rates cool the housing market.
However, the outlook is not entirely negative for B2C firms. New Zealand’s labor market is the strongest it has ever been, with unemployment at an all-time low and wages showing healthy growth. The country is also benefiting from the rollback of COVID-19 restrictions and the return of international tourists. Furthermore, consumption growth in Q1 2022 was robust, with demand booming for on-trade services and non-durable goods. In April and May, card transactions in retail outlets also showed strong growth.
Moving forward, we expect demand for durable goods and big-ticket purchases to weaken. Households will begin to defer these purchases in order to bolster their savings during this period of heightened economic uncertainty. Households will also trade down on various consumer goods and food items, wherever possible, to cope with pricing pressure. Demand for local services and out-of-home entertainment will also weaken somewhat, as consumers look to limit discretionary spending; however, the impact in this segment is expected to be the smallest, as demand will be buoyed by returning tourists and revenge spending from residents who have faced two years of heavy restrictions.
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