Retail, Risks, Rates And Refixes. Also, BBQs

There have been wobbles and false dawns before, and we’d be silly to rule out another. But, to us, the fact the economic recovery appears to be broadening out to the important, and hitherto lagging, retail and construction sectors is a relatively new and important development:

• Third quarter retail sales volumes were reported at 1.9%, the strongest quarterly growth in just under four years and three times consensus expectations. The strength was a little hard to reconcile with some of the anecdote, and it was clear one-off purchases of cars and electronic goods overstated the headline stats. But it’s hard to escape the conclusion the retail pulse has turned. That’s been helped along by strong primary sector cash-flows, lower interest rates, and the renaissance in international tourism numbers.

More timely indicators like Stats’ and our own card spend data point to the momentum continuing into Q4. Annual growth in spending values on BNZ cards has averaged 7% over the past three months and rose to 7.7% in November. Amongst the detail, an increasingly broad-based reflation in discretionary spending categories has caught our eye.

• Residential construction tends to punch above its 6-7% of GDP weight when it comes to influencing NZ’s economic cycle. So signs the building cycle has turned are encouraging not just for the industry but also parts of the manufacturing and retail sectors. Friday’s November manufacturing PMI rose to 51.4 and remains on an improving trend (an index reading above 50.0 denotes expansion).

October building consent issuance managed to sustain the gains of the three prior months such that the level of consents is now 24% higher than April’s low. That accords with our expectation residential building activity is poised to lift through next year, although we still think tepid fundamentals will limit the strength of the upturn (forecast chart below).

Strong GDP bounce expected

These more encouraging signs remove some but certainly not all of the risk (see below) on our expectations for a sustained economic recovery next year. We continue to forecast a pickup to trend-like annual growth of 2-3% by the second half.

Thursday's third quarter GDP figures will be an important way point on the journey back from Q2’s -0.9% q/q shocker. We’re expecting a strong 0.9% bounce which, if realised, would see annual growth jump back into the positives for the first time in 18 months (+1.3%y/y expected).

Quarter-to-quarter volatility in these numbers remains problematic so overinterpret at your peril! Average quarterly growth this year of 0.3%/quarter feels closer to the ‘truth.’

What are the curveballs?

It may not be very festive, but back to those risks for a sec. There are a few more worth flagging based on what we’ve seen recently. That’s in addition to some of the other big ones like domestic political uncertainty and the likelihood of one or two more global wobbles next year.

• Dynamics in global dairy markets are changing rapidly. Dairy auction prices have fallen 22% from the May peak as global milk supply has surged earlier than expected. Milk production growth out of the big four exporters (EU, US, Australia and NZ) is running at the highest level in over ten years. Fonterra has consequently lowered its Milk Price forecast for this season to $9.50 per kgms. We’ve done the same but caution the risks are tilted heavily to the downside. Current season Milk Price futures for example are trading around $9.15 kgms. It’s important to note the still large supports for exporter incomes from strong milk and horticulture production and very elevated beef prices. But the shifting state of the dairy cycle may well change the calculus around how next year’s $3.2b capital return to Fonterra suppliers is spent/invested/saved.
• Population growth could be slow in turning, something that would restrain momentum in a number of areas. This risk doesn’t entirely hang on NZ’s prospects but also on the relative appeal of alternative migration destinations. Essentially, Australia continues to look good. Not just in the cricket but also in possessing an economy and labour market that simply refuses to lie down. If NZ workers continue to be attracted across the Tasman in large numbers, it would lean against the anticipated recovery in NZ population growth next year.

• Then there’s the question of whether the recent spike in wholesale interest rates is a risk to the recovery.

Since the Reserve Bank (RBNZ) lowered the official cash rate 25bps on 26 November, wholesale interest rates (swap yields) have, depending on term, increased 30-55bps. They’re up 35-75bps relative to the recent October lows. That’s as markets have moved to almost fully price a 25bps RBNZ hike by July next year.

Mortgage rates had, until recently, not moved over this time frame so upward pressure exists, and we saw a couple of banks act on this last week and lift mortgage rates for 2-5 year terms.

There had been some speculation new Reserve Bank Governor Breman might try and curb financial market enthusiasm for higher rates at a media engagement last week. It didn’t eventuate.

Implications for mortgage rates

So where are we left on the mortgage rate outlook? We make the following points:

• The lift in wholesale interest rates has not solely been driven by the RBNZ’s declaration the rate cutting cycle is over. It also reflects the improved tone of NZ economic data since that declaration, market positioning and liquidity, and the vibe blowing in from across the Tasman where markets are now pondering a first half rate hike from the Reserve Bank of Australia. The lift in NZ wholesale rates may well have got a little ahead of itself and some correction forthcoming. But in our view the spread of factors underlying the move limits how far any correction back down could extend.
• Accordingly, the prospects for additional declines in mortgage rates, other than for very short fixed terms, are now limited in the absence of another unexpected shock hitting the economy.

• Unless wholesale rates were to dramatically reverse course, the bigger risk is that we see upward adjustments in particularly longer-term fixed mortgage rates from here. A ‘steepening’ of the mortgage curve in other words.
• We’re left with more support for the view expressed in our recent Property Pulse that “there’s now more merit in looking to extend the term of mortgage borrowings”. Borrowers have been slowly doing so – the share of mortgage borrowings on terms of a year or less has fallen from 83% in February to 75% in October. It’s possible this process could accelerate.
• It’s important to remember that, even if fixed rates nudge up a little from here, the vast majority of mortgage borrowers soon to experience a rate reset will roll onto a lower rate than previously. About 37% of all fixed rate borrowings will reprice in the next six months. So the important macro support of mortgage refixing boosting household disposable incomes remains intact. The effective or average paid mortgage rate, which RBNZ data put at 5.27% in October, is set to keep falling. We estimate it will move below 5.00% by March.

BBQ inflation warms

Finally, and on a lighter note, we finish with our traditional update of our summer BBQ cost index. The news here is troubling, if unsurprising, with grill-flation re-igniting after two years of relatively minor price changes.

Our selection of ingredients required to lay on a large BBQ has increased in price by 7.5% over the last 12 months.[1] Butter, cheese, and bread were the major upward contributors, partially offset by lower prices for tomatoes, chips, mayo, and chicken.

A BBQ nonetheless still offers relative value as a dinner option. The 23% increase in the BBQ cost index since 2020 is naturally unwelcome but comes in a little under the 25% increase in general prices (per the Consumers Price Index) over the same period, and the steeper 29% increase in Stats’ overall Food Price Index.

All the best for the holiday period and 2026.

[1] Results sensitive to ingredients selection! Year to October 2025. BBQ fuel and labour costs not included.