Core Retail Sales Trend Heading South In NZ

Core Retail Sales Trend Heading South In New Zealand

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Retail sales in New Zealand tumbled in February, bucking expectations for a modest rise. Retail sales fell 0.6%m/m (J.P. Morgan: 0.3%, consensus: 0.2%), after spiking 0.8% in January. Six of the 24 retail industries recorded falls of more than NZ$5 million.

More importantly, and indicative of the underlying weakness on the consumer front, core sales slumped 0.9%m/m (J.P. Morgan: 0.1%, consensus: 0.4%), marking the second fall in three months. In December, core retail sales posted a record 2.0% fall. Painting an even bleaker picture of the retail sector, the trend in the core measure is falling now for the first time since 1995, and is down 1.0% since October. The weakness can be linked to some extent to the recent drop in food prices, with the food price index falling 2.8% since July last year. Around 45% of the value of core retail sales comes from the five food-related industries - supermarket and grocery stores, fresh produce retailing, takeaway food retailing, other food retailing, and cafes and restaurants – which fell NZ$12 million in total in the February month.

Significant falls also were recorded in discretionary areas of spending, with department store sales down 3.3%m/m and appliance retailing down 4.2%. Large falls were also recorded in supermarket sales (-0.7%) and sales at cafes and restaurants (-2.1%). Motor vehicle retailing was down 1.0% over the month.

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Any recovery in consumer spending this year, in our view, will be relatively benign. With petrol prices recently rising, housing market activity moderating, and labour market conditions weak, households will remain cautious. But, the retail sales data also will become more difficult to read in coming months. If it is announced in the May Budget that the government will lift the GST to 15% from October 1, we would expect to see some spending bought forward to around midyear History shows there is an incentive for consumers to spend ahead of an indirect tax rise, particularly on big ticket items, such as cars and furniture.

With respect to monetary policy, the 1Q CPI numbers (April 20) are, of course, critical to the upcoming RBNZ’s policy decisions, but with the monthly economic data continuing to disappoint, we suspect to see a change of rhetoric in late April. In the statement accompanying the OCR announcement on April 29, the RBNZ will likely step away from its current policy guidance. The official guidance suggests that the policy stimulus in place may be removed “around the middle of 2010” but Governor Bollard will likely drop the explicit reference to the timing of the first rate hike, allowing himself more flexibility to delay such a move if economic conditions fail to evolve in line with the RBNZ’s expectations. We maintain our call for the first rate hike to be delivered in July, but, if anything, the risks are skewed toward a later move.

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ENDS

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