Data Flash (NZ) Retail Sales - April 2002
Data Flash (New Zealand) Retail Sales - April 2002
Result: Retail sales rose 2.6% mom, easily beating market expectations of a 1.0% mom rise.
Implication for markets: There was little market reaction to this strong result, which has in part been distorted to
some extent by the timing of Easter. We expect retail sales to post a 0.9% mom decline in May.
Commentary
Abstracting from recent volatility due to the timing of Easter, retail sales growth has proceeded at a very rapid pace
over the first four months of 2002. In our view, this reflects a combination of past strong growth in farm incomes,
strong growth in employment, reasonable growth in wages (more so in the public sector), robust levels of consumer
confidence, a rebound in tourist arrivals, very strong population growth driven by substantial migrant inflows, a
buoyant housing market, timing effects due to regulatory changes with respect to imported motor vehicles and the lagged
impact of low interest rates. If such pace were to be sustained, further substantial monetary tightening would likely be
necessary to restrain overall demand to a level consistent with the economy's capacity to supply.
However, we think that the outlook for consumer spending is considerably less rosy than an extrapolation of the recent
trend would suggest. In short, we believe that recent growth is not sustainable and that a substantial slowing of retail
activity is likely over the remainder of this year. This is because many of the factors which have supported retail
sales growth over the past six months now appear likely to lessen in importance, and in some cases, go substantially
into reverse.
In particular, reflecting weakened commodity prices and a stronger NZD, farm incomes are expected to decline
substantially over the coming season. The dairy sector alone is expected to see income levels fall by as much as $1.7bn
over the coming season - 1.4% of GDP. As the implications of this income loss become more visible, regions such as the
Waikato, which has seen 9% growth in sales over the past 4 months alone, are likely to see much slower growth in sales,
if not an outright decline. The prospect of El Nino weather conditions adds to the risk of lower activity in the rural
sector.
Several other factors are likely to assist in slowing the growth in spending: We expect some payback from the surge in
motor vehicle sales that took place as a result of new regulations on the importation of motor vehicles on 1 April.
Motor vehicle sales rose 7% mom in April, making another strong contribution to the overall rise in retail sales.
However, motor vehicle registrations declined 9% mom in May, suggesting that a strong fall in motor vehicle sales is
likely. Monetary conditions have tightened substantially and further tightening is expected. Following a 25bp rise in
the OCR in mid April, the RBNZ tightened by a further 25bps in May, and we expect a further 75bps of tightening by the
end of this year. Meanwhile, the NZD has surged by 7% on a trade-weighted basis since April, with further gains expected
to be made over the remainder of this year. Higher interest rates should contribute directly to a slowing of domestic
demand while the stronger exchange rate will offset much of the benefits of the global economic recovery for the export
sector.
We think that the net migrant inflow has peaked (although there is some doubt about the extent to which inflows will
actually decline in the near-term) and that the housing market is close to peaking. This should reinforce the slowing in
durables demand that will occur as the replacement cycle runs its course. After several months of rising petrol prices,
helping to boost sales in the motor vehicle service sector, average petrol prices declined in May, which should
translate to lower sales.
As far as near-term monetary policy settings are concerned, despite considerable criticism from the business sector, and
implicit criticism from the Government, we think that the RBNZ will look to return the official cash rate to a broadly
neutral 6% over the next two meetings (3 July and 14 August) with a 25bp hike on each occasion. We do think that there
is a 20% risk that the Bank decides to skip the 3 July meeting pending a fuller assessment of the impact of the surging
NZD. However, the most likely impact of the higher exchange rate is that the rate hike cycle is curtailed at a lower
level then signalled by the RBNZ in May. We now look for the cash rate to peak at 6.25% (by year-end), compared with the
6.75% peak projected by the Bank in May.
Key points
Total nominal retail sales rose 2.6% mom in April to be 10.3% higher than a year earlier. We and the market had expected
a 1.0% mom rise. This followed a 0.5% mom decline in March (previously reported as a 0.8% decline). The timing of Easter
is thought likely to have impacted on the recent monthly pattern, and this is expected to carry over to a 0.9% mom
decline in May. Averaging the last three months together with our forecast for May suggests that growth momentum has
been running at around 1% mom.
Strong growth in sales of durable goods continues to be a dominating factor. Motor vehicle sales rose 7.2% mom,
furniture sales rose 4.1% mom and appliance sales rose 10.2% mom. This likely reflects the impact of strong population
growth and low interest rates, with associated high levels of turnover in the housing market.
Excluding auto sales and services, core retail sales rose 1.7% mom/8.7% yoy. On a regional basis, sales in the Waikato
region surged 4.8% mom while sales in the Auckland region rose 3.7% mom. South Island sales rose 2.0% mom.
Darren Gibbs, Senior Economist
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