New Zealand's retail sales unexpectedly plunged 0.8% in July
The value of New Zealand's retail spending dropped more than expected in July, falling 0.8%m/m against JPMorgan and
market expectations of a modest 0.3% fall. This all but reverses the revised 1.0% rise in sales in June (previously
shown as a 0.9% rise). The weakness was due partly to soaring petrol prices, which reached a record high during July.
Sales ex-autos also fell, so the weakness in spending was broad-based. Sales ex-autos dropped 0.2%m/m against market
expectations of a 0.3% rise, following a 0.2% rise in June. Annual growth in total retail spending has fallen to just
1.1%oya, from 2.4% in the year to June.
Sales fell in 13 of the 24 retail categories in July. Car sales plunged 5.3% over the month and, of the other retail
categories, the biggest declines were in sales of furniture, hardware, "other" retailing, and at cafes and restaurants.
Sales at supermarkets plunged 2.0%m/m, even though food prices rose over the month. On the flipside, though, clothing
sales bounced 9.0% over the month (albeit after a big fall in June) and spending in department stores unexpectedly
soared 5.9%, reversing a similar-sized drop in June.
The weakness in retail spending supports the RBNZ's sentiments in yesterday's monetary policy announcement that the
household sector is likely to experience an extended period of adjustment. Interest rates remain high, even after
yesterday's surprise 50bp cut in the OCR, petrol prices only recently started to fall, consumer confidence has
stabilized but remains fragile, the labour market is softening, and house prices are falling. The only dim light
flickering at the end of a long, dark tunnel is the prospect of income tax cuts from 1 October. Given the strengthening
headwinds for households, though, the tax cuts probably will do little more than cushion the downside.
The weakness in the household sector, the problematic global economic and financial market outlook, sagging domestic
house prices, the falling terms of trade, and the improving prospect that inflation will return to the RBNZ's 1-3%
target range over time do mean there is scope for the RBNZ to continue to cut the official cash rate in coming months.
We believe, though, that the case for measured, 25bp rate cuts in October and December (there is no OCR review in
November) still outweighs the case for 50bp rate cuts, which carry the unpleasant appearance of desperate RBNZ officials
trying to prevent the economy from falling into an even deeper recession.
Moreover, one key risk rightly raised by the RBNZ yesterday was the danger of further significant NZD weakness, which
dived after yesterday's unexpectedly assertive official rate cut. Further 50bp rate cuts could send the NZD into a
tailspin, which inevitably would worsen the already difficult near term inflation outlook.
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