8/4/2023 12:00:00 AM

Market Watch: Why high interest rates aren’t crashing the economy ... yet

By Liam Dann

Demographic trends are preventing the economy from crashing despite the fastest and steepest rise in interest rates in modern history, says Pie Funds chief investment officer Mike Taylor.

Central banks - including New Zealand’s Reserve Bank - have embarked on an aggressive tightening cycle pushing mortgage rates to highs not seen since 2007.

But there are few signs that the economy is buckling under the weight of the higher debt repayment burden.

The latest data from credit agency Centrix shows the number of consumers and homeowners who are behind on debt repayments actually fell in June.

Mortgage arrears fell to 1.29 per cent, down from 1.32 per cent in May 2023 and well off a recent pre-pandemic peak of 1.55 per cent.

Consumer arrears fell slightly month-on-month in June to 11.4 per cent of the credit active population - down from 11.7 per cent in May - with the number of people behind on repayments now 414,000.

The current arrears level is 5 per cent higher year-on-year, tracking slightly above pre-pandemic levels after coming off historic lows.

Business liquidations have risen sharply in the past 12 months, up 36 per cent year-on-year, although off a low base with total liquidations still below pre-pandemic levels.

“Coming into this period a lot of people got the opportunity to fix their mortgage around the 2 or 3 per cent mark - that’s slowly rolled off,“ Taylor said. “But even now with a rate of 7 [per cent], I think the average mortgage book is still about 5 [per cent].”

“Why I don’t think it’s having a material impact is that a lot of the wealth does tend to sit with the baby boomers and the silent generation. Typically, if you are over 60, you probably don’t have a mortgage and you’re reasonably well off.”

So, as the population ages, the central’s bank’s ability to directly influence people wanes.

The impact was falling on younger people with newer mortgages and younger families.

The Centrix report also noted that those between the ages of 18 and 40 were more likely to be falling behind on debt repayments.

Even there, the rate of default remained historically low.

“One reason is the amount of pent-up savings that households were able to accumulate through the lockdown period from early 2020 until the end of 2021,” Taylor said.

There were significant savings not only from lower interest rates on mortgages but also just from just being at home and not having things to spend money on, other than what you could buy online, he said.

“General savings rates rose significantly. There was a significant amount of monetary and fiscal stimulus that money had to go somewhere and of course, a large portion of it went into household balance sheets.”

Mike Taylor is the founder and chief investment officer at Pie Funds.

While it was good news that people were coping with higher rates, the delayed impact was a headwind for central banks, Taylor said.

Inflation was coming off - particularly in the US - but was likely to be persistent and remain above 3 per cent until unemployment started to rise.

“That last portion of inflation will be quite hard to get rid of,” Taylor said.

”It will probably take a rise in unemployment to quash that last portion of the inflation.

“And that’s the question for the Reserve Bank or the Fed in the US. Are they prepared for job losses to have that last 1 or 2 per cent of inflation go away.”

The Market Watch video is produced in association with NZ Herald and Pie Funds. Liam Dann is Business Editor at Large for the New Zealand Herald. He is a senior writer and columnist as well as presenting and producing videos and podcasts. He joined the Herald in 2003.

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