Data Flash (New Zealand) Retail Sales - February 2002
Result: Retail sales rose 1.8% mom, easily beating market expectations of a 0.3% mom rise.
Implication for markets: The very strong result is consistent with our view that Q1 GDP will rebound very strongly from
a disappointing Q4, with our preliminary estimate of +1.1% qoq now looking light (in our view, growth of over 1.5% qoq
is not out of the question). While we still expect the RBNZ to deliver a 25bps hike at next week's interim OCR review,
today's data challenges our view that the RBNZ can afford to hike by just 25bps at the subsequent meeting in May,
notwithstanding possible inaction by other major central banks.
Commentary
Retail sales growth continued at a very rapid pace in February. While strong migration flows and a rebound in tourist
arrivals may explain part of the rise, in our view, just as important are rising levels of consumer confidence (both
general confidence and confidence about the direction of house prices) and low interest rates. Rural sector spending is
also buoyant, reflecting past growth in farm incomes.
Even assuming a significant slowdown in growth during March, it appears that growth in the volume of retail sales is now
shaping up to exceed 2% qoq in Q1. As a result, our earlier forecast of 1.1% qoq growth in Q1 GDP - already stronger
than many of our competitors - now risks being too light, notwithstanding what appears to be a significant retracement
in plant and machinery spending after a very strong Q4. In fact, we have little difficulty envisaging an outcome
stronger than 1.5% qoq.
As a result, while Q4 GDP disappointed our expectations (and those of the RBNZ), growth over Q4 and Q1 combined now
appears very likely to at least meet, if not exceed the RBNZ's March Monetary Policy Statement projections. In our view,
this puts the RBNZ back on track to deliver, as a minimum, the series of 25bp tightening moves signalled in those
projections, taking the OCR to around 6.25% by year-end.
What does the current strength of domestic demand mean for monetary policy over the longer-term? In our view, the
strength of consumer demand is a clear indication that past easy policy settings are no longer appropriate and that some
withdrawal of stimulus is warranted. That conclusion should elicit little debate. What is unclear, however, is how much
tightening will be required to reign in consumer spending to more sustainable rates of growth.
Given our estimates of the current rate of growth in nominal incomes, we think that a good portion of the surge in
spending is being financed by borrowing, as reflected in growing signs of a substantial decline in household saving and
a significant widening of the nation's current account deficit. Therefore, given already high levels of household
indebtedness, we would not be surprised at all if retail spending growth begins to slow markedly as the RBNZ hikes
interest rates.
This will especially be the case if current household expectations regarding movements in house prices prove to be too
optimistic (we will continue to watch migration data closely). We also suspect that the implications of recent sharp
declines in commodity prices (especially in the dairy sector) are yet to be factored into rural spending decisions.
For this reason, we remain hesitant to conclude that a very aggressive tightening cycle is warranted. We see the rate
cycle peaking at 6.50% (25bps higher than projected by the RBNZ, although we also expect an appreciating NZD to make a
substantial contribution to the overall tightening in monetary conditions).
As for near-term policy settings, we agree with the market's pricing of a 25bps rate hike by the RBNZ at the 17 April
interim OCR review. Looking further ahead, we continue to believe that the RBNZ will deliver a further 25bps hike at the
May Monetary Policy Statement meeting. However, should data continue to print as strong as today's retail sales release
over the next six weeks, there is a clear risk that the RBNZ could feel compelled to step up the pace of tightening. On
the local front, Thursday's QSBO, Friday's Job Ads and next Tuesday's CPI are the next important data releases that
market's will need to digest.
Key points
Total nominal retail sales rose 1.8% mom in February to be 9.9% higher than a year earlier. The market had expected a
0.3% mom rise.
Excluding auto sales and services, core retail sales rose 1.2% mom/9.2% yoy. Strong growth in sales of durable goods
continue to be the dominating factor. Appliance sales rose 7.1% mom while motor vehicle sales rose 4.4% mom.
On a regional basis, sales in the Auckland region rose just 0.3% mom while sales in the Waikato region rose 1.0% mom.
However, sales in the Wellington region - which has recorded very little growth over the past year - rose 2.5% mom and
sales in the remainder of the North Island rose 2.8% mom. South Island sales rose 1.0% mom. We think the reported growth
in Wellington, in particular, is difficult to explain. This leads us to treat the aggregate growth rate with a degree of
suspicion, although there is little doubt that the retail sector is extremely buoyant at present.
Darren Gibbs, Senior Economist