Data Flash (New Zealand) Retail Sales - May 2002

Result: Retail sales fell 1.2% mom, partially reversing a 2.6% mom rise in April.

Implication for markets: There was little market reaction to this slightly weaker than expected result. We continue to look for a further (and perhaps final) 25bp rate on 14 August (70% probability).

Commentary

Today's reported decline in retail spending in May was to be expected after the very rapid growth reported in April. Abstracting from recent volatility, due in large part to the timing of Easter, growth in retail sales has proceeded at a rapid pace over the first five months of 2002, averaging 0.7% mom. If such rates of growth were to continue, the 6.25% peak in the OCR that we project would likely prove too low. However, in our view, growth in retail sales has already peaked. Indeed, whereas growth over the first half of 2002 has been running at around an 8-9% annualised rate, we expect growth over the second half of 2002 to proceed at less than half of that. The decline in momentum is reflected in Statistics New Zealand's estimate of the trend growth rate, which has moderated to 0.5% mom in May from 0.9% mom in March.

In previous research we have set out in some detail why the growth rates recorded over the early part of 2002 were unlikely to prove sustainable. In large part, our view reflected natural cyclical forces (especially for durable goods), recent and prospective rises in interest rates, and a deteriorating outlook for rural sector incomes. In recent weeks, several indicators have begun to support our view and point to weaker (although still reasonable) retail growth ahead:

The latest TV3 poll showed a fall in consumer optimism from +39 to +24 - a much larger fall than can be explained by seasonal factors.

Indicators that we follow suggest that nationwide house sales posted a reasonable decline in June after a small fall in May. In our view, housing activity appears to have peaked in March.

Although rebounding somewhat in June, the number of car registrations has declined after rising to an historic high in early 2002 (the earlier surge influenced by the introduction of new safety regulations for used cars).

As far as near-term monetary policy settings are concerned, despite ongoing criticism from the business sector and the Government, we still think that the RBNZ will look to return the official cash rate to a broadly neutral 6% at the next meeting on 14 August (70% probability). It remains our view that the RBNZ will leave the OCR unchanged at the 2 October meeting. Thereafter, whether or not further rate hikes occur lies in the balance, but for now we continue to pencil in a final 25bps hike in November, taking the cash rate to a cyclical peak of 6.25%.

Key points

Total nominal retail sales fell 1.2% mom in May but were 7.8% higher than a year earlier. This was close to our expectation of a 1.1% mom decline (the median market expectation was for a 0.6% mom fall).

The weak May followed a strong 2.6% mom rise in April. The timing of Easter - and the difficulty of capturing its impact when producing seasonally adjusted data - has contributed to the usual volatility seen in this data.

A 4.2% decline in auto sales was a key factor driving total sales lower in May. Excluding auto sales and services, core retail sales fell a lesser 0.8% mom in May and was 7.4% higher than a year earlier.

On a regional basis, the Waikato region recorded a 3.1% decline in sales in May (the first decline in the region since July last year). A 2.6% mom decline was recorded in the Canterbury region, where sales momentum seems to have slipped progressively since the beginning of this year.

Assuming a negligible rise in spending in June (with sales unlikely to have been helped by wet weather), we estimate that nominal retail sales have grown by around 2.6% qoq in Q2. Based on our detailed forecast for next week's CPI, we think that the retail trade deflator will post a rise of around 0.7% qoq (the full CPI is expected to have risen 1.0% qoq). This implies retail sales volume growth of around 1.9% qoq in Q2 - the third consecutive quarter of very strong growth. Such an outcome would be consistent with our preliminary estimate of around 1.0% qoq growth in GDP. However, in our view, Q3 growth will print substantially weaker (0.5% qoq or less for real retail sales).

Darren Gibbs, Senior Economist

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