|Investment Research Group|
On my walk recently, I noticed the following retailers had closed down, at least two of them after being put into liquidation by their banks: A seafood restaurant, a pub, a coffee bar and an Indian restaurant. Normally, such businesses rarely fail because they have daily cash flows and, during hard times, the proprietors can at least feed themselves. For not one but four businesses within a few blocks to shut their doors suggests all is not well in the NZ economy.
While we supposedly emerged from five quarters of recession with a 0.1% gain in GDP in the three months, this is so close to the likely statistical margin of error that it is possible the economy is still not growing. House and share prices are going up but I suspect this reflects all the easy money being tossed around by the government and Reserve Bank to stave off more economic stress, rather than any sustained lift in business activity.
At a breakfast briefing I attended, ANZ National Bank chief economist Cameron Bagrie showed a sobering graph. This shows that household debt as a percentage of disposable income in this country has risen from 60% in the early 1990s (the last time we had a recession) to around 160%.
Unemployment is rising and many people are fearful of losing their jobs. Mortgagee sales remain at very high levels. I suspect people are using, and will continue to use, any spare money they have to retire debt. They are not spending up large on eating or drinking out - which probably explains the huge jump in turnover at KFC, a Restaurants Brands (RBD) fast food chain.
The amount of money required to service debts is about to go up as interest rates start to rise. The Reserve Bank will not move slowly and steadily when it begins to lift rates next year but is expected to make big leaps of 50 basis points a time, raising rates as much as 2% above the current level.
Since household debt in this country is over $165b, a rise in rates of this magnitude could take billions of dollars out of the pockets of retailers and other providers of goods and services to kiwi consumers. These rises will also have more impact than the previous round a few years ago. That's because most mortgages were on low fixed rates and rates rises had little impact on most people's back pockets. Today, by comparison, most mortgages are floating and therefore are very sensitive to interest rate rises.
Few people are interested in locking in for five years at around 8.6% when floating rates are still under 6% but the time may come when the former looks like a bargain. Much depends on whether inflation arises, which will force interest rates above the current process of 'normalisation'.
There is still not a lot of sign of this, and I note that 10-year government bond rates have been falling, from 5.97% in June to 5.8%. Despite positive signs, it is foolish to think that everything in the economy and financial sector is back to normal and investments should be structured accordingly. Dangers still lurk in the hidden corners of the economy.