Retail Sales (September and Q3 2001)

Data Flash (New Zealand)
Retail Sales (September and Q3 2001)

Key Points

The value of retail sales rose 0.7% mom in September - stronger than the market's expectation of a flat result. Excluding motor vehicles sales and services, sales rose 1.1% mom following a 0.1% decline in August. The rise was largely accounted for by a 2.6% mom rise in food purchases, which in turn would have been influenced heavily by a 1.8% mom increase in food prices during the month.

Over Q3 as a whole, the value of total retail sales increased 1.1% qoq while the retail trade deflator rose by a smaller than expected 0.6% qoq (and was 3.3% higher than a year earlier).

As a result, and allowing for rounding, the volume of retail sales - representing around 40% of private consumption - rose 0.6% qoq to be 2.8% higher than a year earlier.

This outcome was in line with market expectations but stronger than we had expected. However, excluding motor vehicle sales and services, `core' retail sales volumes rose by a more modest 0.2% qoq to be 2.0% higher than a year earlier.

On a storetype basis, outside of motor vehicle sales and services - which recorded volume growth of 1.7% qoq and 1.2% qoq respectively - significant volume growth was recorded in sales of clothing (+4.1% qoq), furniture (+2.8% qoq), chemists (+2.3% qoq), accommodation (+1.1% qoq) and cafes (+1.1% qoq). This growth was partially offset by lower sales by department stores (-3.8% qoq) and lower sales of personal and household goods (-1.5% qoq) and recreational goods (-1.5% qoq). Food sales were broadly unchanged in volume terms.

On a regional basis, growth was recorded more-or-less across the country, with the exception of the Wellington Regional Council Area which experienced a 0.8% qoq decline in nominal sales.

Retailers' stock-to-sales ratio remains at a comfortable level.

Commentary

The Q3 retail sales outcome - the first major GDP partial - was not quite as weak as we had expected, largely due to our overestimation of retail price inflation during the quarter. Therefore, for now, we have decided to retain our provisional estimate of 0.6% qoq GDP growth in Q3, albeit with an element of minor downside risk.

Given an estimated 0.2-0.3pps negative impact due to the electricity crisis, and the very strong growth experienced in Q2 (2.0% qoq), in our view such an outcome would represent a good result, especially in the context of the growth rates currently being recorded in many developed countries. However, given the continued deterioration in the global environment, the New Zealand economy will struggle to sustain such rates of growth over the coming year.

Over the first half of this year, retailers have benefited from strong growth in household incomes (driven by higher wage and salary movements, extremely buoyant farm incomes and growing employment), robust levels of consumer confidence and rapid growth in tourist arrivals. These positive influences appear likely to be less significant in the months ahead:

This week's Quarterly Employment Survey hinted that private sector wage growth may be close to peaking.

The massive growth in farm incomes over the past year will not be repeated over the coming year. Indeed, the risk is for lower incomes as falling world commodity prices more than offset the ongoing benefit derived from more favourable foreign currency conversion rates as hedging contracts roll off. This week's Household Labour Force Survey and ANZ job ads survey point to much weaker employment growth over the next year.

Confidence has softened substantially, with the continued deterioration in the global economic outlook, the events of 11 September and the much-publicised financial problems at Air New Zealand all taking their toll.

Despite the more optimistic forecasts of the implications of the terrorist attacks for tourist activity that have been issued in recent days, the tourism sector is still expected to be a drag a retail activity over the next six months, rather than the strong positive influence that has characterised the past year.

Given the above factors, it is perhaps not too surprising that retail sales growth has slowed in recent months. In our view, retail activity is likely to remain relatively sedate over the next six months.

Today's retail sales outcome continues the run of softer domestic data released over the past month or so. Going forward, with the US and Japan in recession, Europe flirting with recession, and the risk that further terrorist attacks delay the expected global recovery, the risks for the New Zealand economy remain firmly on the downside.

In recognition of these risks, and in common with this week's actions by the Fed, the ECB and the Bank of England, we still expect the RBNZ to cut its official cash rate (OCR) by 50bps to 4.75% when it reviews policy settings next Wednesday.

The market is fully pricing over a 90% chance of a 50bps cut, with a 70% chance of a further 25bps cut early in the New Year. With the next scheduled review not set down until 23 January, we would be surprised if the RBNZ chose to disappoint the market next week. We think that a 25bps cut would lead to a sell-off in debt markets and would likely have negative implications for the NZD, at least over the near-term.

Darren Gibbs, Senior Economist

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