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Wednesday, May 29, 2024

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Is Your Superpower Spending Less? You Could Save NZ’s Economy

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It’s very financial doom-and-gloom at present. But you can make a positive difference for yourself, and NZ.

In November 2022, the NZ Reserve Bank hiked up the official cash rate (OCR) 75 points to 4.25%, and predicted a peak rate of 5.5% in 2023. This means life gets more expensive, and your mortgage and loan interest rates are going to increase. They are deliberately on course to engineer a recession.

This disproportionately affects low-income households, those who are already struggling to survive. While there are other strategies the Reserve Bank could take, this blunt tool is the choice they’ve made. The Reserve Bank governor, Adrian Orr, says that Kiwi’s need to ‘start behaving’ to avoid further financial stress. What does he mean by that, and why are they willing to force a recession?

Why Create a Recession?

NZ’s economy is in flux right now. The pandemic reduced the availability of some goods and services in NZ. So, prices rose. There is also low unemployment leading to rising wages in the private sector as employers try to attract and retain scarce staff. This has meant our rate of inflation was 7.3% and 7.2% for the past two quarters; a far cry from the 2% – 3% that the Reserve Bank is meant to keep inflation to.

While these high rates of inflation are being faced in most countries across the world (the US is currently at 7.7%, the UK 11.1%, and Aussie at 7.3%), the Reserve Bank wants to act now to slow the economy down. And that’s what raising the OCR rate does.

It means interest rates go up, so the interest bill on mortgage repayments increases. People start to lose confidence in the economy, which slows their spending and increases their saving. With people buying less, demand for goods and services drops, businesses lower their prices to remain competitive, and this leads to a drop in inflation.

It’s not a bad thing in many ways—Kiwis could definitely save more and start ditching the capitalist culture of buying ‘stuff’ that other cultures have. But a recession hurts young homeowners, low wage earners, and other economically vulnerable people most.

What High Inflation Does to the Value of Your Money

You would have to be living under a rock to not know how inflation has impacted the value of your money. Every grocery shop sees less and less goodies in the trolley for the same amount of money.  While seeing your money not go so far can make you think twice about spending too much, it can have the reverse effect if you have disposable income to purchase “stuff” that you know (thanks to inflation) are likely to cost more next month or year. So people bring their purchases forward creating more demand and adding to the inflationary bon fire.

Hey Kiwis, Start Behaving (Financially)

The solution to this is for Kiwis to STOP SPENDING MONEY! (Other than the essentials of course). Don’t wait until your spending habits become unsustainable, and your bank account has tumbleweeds blowing through. The Reserve Bank says that if Kiwis stop spending money, inflation slows, the next predicted OCR hike won’t need to happen, and we can avert financial disaster.

What’s the Alternative If We Don’t Behave?

Over the next few months, the RBNZ is forecasting inflation to increase again in the December quarter, the unemployment rate to fall, and wages to rise again.

But looking further into the future, it’s predicted that the OCR will rise to 5.5% next year. NZ could well go into recession from mid 2023 until mid 2024. House prices will drop about 20% (this is not necessarily a bad thing). Then, unemployment rising in next year, and inflation will go back to its usual range late 2024. It could be one hell of a ride.

The RBNZ’s recession threat isn’t meaningless; it’s saying your actions will directly affect the next few years in NZ.

What Can You Do?

In short: Save more, spend less. It’s not a bad thing, your bank account and future self will thank you for it.

It’s easy to think about spending now, because prices are only going to go up, but that’s counterproductive. It’s that kind of attitude that ensures this recession is going to be worse, and things will be more expensive in the future.

If you stop spending, inflation slows, unemployment increases, and the pressure on salaries to increase resolves. This helps to avert the recession, or limit the damage it does.

Put off making any big purchases if you can avoid or delay it. No new car, no flash new fridge, don’t install that pool you have always wanted (they aren’t a good investment anyway, and NZ weather means it won’t be used as much as you think, let’s be honest). Put off renovation plans unless you’re a DIY’er; tradespeople, especially in construction, are facing increased costs and high demand. Keep Christmas shopping modest (put more thought into finding awesome less expensive gifts. The thought truly does count).

While you’re not spending money, pay off your credit card and mortgage with renewed enthusiasm. Get that debt down, and decrease the interest payments in your future. You can take this time as a prohibition on spending money and turn it into a positive. Shore up your financial future, save your money, and save NZ’s economy. Maybe that’s your superpower.

Need Help to Trim Your Finances or Manage Your Debt?

Contact us at Smart Adviser to have a chat. There may be some changes you can make like changing your mortgage provider or terms that could save you substantial money. We can also help you find where the excess fat can be trimmed from your budget, resulting in a leaner household, but still a healthy, happy life.

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