Data Flash (New Zealand)
Retail Sales - December Quarter 1999
Key Points
Retail sales (nominal, s.a.) rose by 1.1% mom in December, following -1.0% and +0.1% results for the preceding two
months.
The strong December result was partly due to household spending on Y2K preparedness and millennium celebrations at the
end of the month.
Despite the volatile monthly pattern and hardly any increase in the level of sales between the September and December
months, December quarter sales increased by an overall 1.5% relative to Q3. (High monthly growth rates in the September
quarter explain this statistical effect.)
The value of sales in Q4 was up 6.8% on 1998.
A high retail trade deflator in Q4 of 0.7% meant that the 1.5% increase in Q4 sales values translated to a volume
increase of only 0.8%.
Q4 sales volumes were 5.7% up on the previous year.
Statistics NZ commented that the apparent discrepancy between a high retail trade deflator (+0.7% qoq) and the
surprisingly low CPI for Q4 (+0.2% qoq) was due to different sectoral weightings between the two measures, as well as
compositional factors.
Commentary
The 0.8% increase in retail sales volumes in Q4 is consistent with around 1.0% qoq GDP consumption growth and supports
our forecast of 1.0% GDP growth in the December quarter. That data will be published on 27 March.
With special factors partly behind the increase in spending in the December month, a reversal of these influences
suggests a comparatively weak January month and Q1 as a whole.
Such a pattern would be consistent with other indicators, like employment intentions and job advertisements, which
suggest that the economy is likely to go through a consolidation phase in Q1/2000 after rapid growth during the second
half of last year.
We consider that a temporary phenomenon, with the general environment still supporting growth of 4% this year: - While
the RBNZ is expected to pursue a comparatively aggressive interest rate tightening path in the international context, it
will take until mid-year to return the cash rate to `neutral' (estimated to be around 6.0-6.5%). Further rate hikes
beyond that would still leave short-term interest rates significantly below levels experienced during the last cycle. -
The exchange rate is forecast to remain at very competitive levels (around 20-30% lower than during the last upswing),
which will add to the positive influence on the export sector from a strengthening world economy and favourable climatic
conditions. - Fiscal policy is likely to become gradually more expansionary.
Overall, the medium-term growth fundamentals justify the pre-emptive strategy pursued by the RBNZ with respect to
interest rates, particularly considering the underperforming NZD.
We expect a 50 bps cash rate tightening to occur in March, followed by a 25 bps step on 19 April. Following the PR
problem the RBNZ got itself into by tightening two hours before a surprisingly low Q4 CPI on 19 January, further
negative reaction from the media and politicians should be expected as the RBNZ pursues this tightening profile with the
backdrop of relatively soft activity indicators for Q1.
Ulf Schoefisch, Chief Economist (64) 9 351 1375