Retail Sales - June and Q2 2002

Data Flash (New Zealand)
Retail Sales - June and Q2 2002

Today's retail sales data was broadly in line with market expectations, both for the month and for the quarter as whole (the later expressed in volume terms). Over the June quarter, growth in retail sales volumes was a strong 1.2% qoq (albeit around half of the growth recorded in the preceding two quarters), assisted by strong growth in motor vehicle sales (excluding motor vehicle sales and services, growth was a more modest 0.8% qoq). Incorporating the retail sales figures into our GDP model, together with a number of other recently released partial indicators, suggests that our provisional estimate of above-trend growth of around 1% qoq in Q2 remains within the right ballpark, notwithstanding the extremely strong labour market outcome suggested by Monday's Quarterly Employment Survey. Tomorrow's Household Labour Force Survey will shed further light on labour market developments in Q2.

The monthly retail sales statistics, together with various other economic indicators (including confidence surveys, house sales and motor vehicle registrations), suggests that the pace of growth in domestic demand peaked around March/April of this year. Subsequently, growth has settled at a more sustainable rate, with the 0.5% mom result reported for June - the first month since February that has not been influenced in some way by the unusually early timing of Easter - probably a fair reflection of the recent underlying trend in growth. Going forward, the risk is that growth moderates a little further under the weight of declining consumer confidence and weakening income growth. We look for retail volume growth of just 0.5% qoq in the September quarter. This would be consistent with overall Q3 GDP growth of around 0.6% qoq.

Our view regarding the near-term outlook for domestic monetary policy is unchanged from that outlined in some detail last week ie we see the OCR remaining at 5.75% for the remainder of this year. In the current difficult global environment, we think that any residual `excess' strength in the domestic economy should be welcomed by the RBNZ, despite the fact that most indicators suggest that the economy is currently operating at or slightly above its sustainable productive capacity. While inflation looks likely to remain in the top half of the 0-3% target band over the near term, especially with the exchange rate having given back its post-May MPS gains, we do not see inflation seriously threatening the top of the target range in core terms. And given changes foreshadowed by the Finance Minister with respect to the Bank's Policy Targets Agreement, we think that such an outcome for inflation should be acceptable to the Bank. For this reason, we think that the OCR could remain at 5.75% for quite some time.

The data

The value of retail sales rose by 0.5% mom in June, marginally stronger than the market's expectation of a 0.4% rise. Excluding the automotive sector, core retail sales also rose by 0.5% mom.

Over Q2 as a whole, the value of nominal retail sales increased by 2.3% qoq. With an increase in the retail deflator of 1.1%, the volume of retail sales - representing around 40% of private consumption - rose 1.2% qoq, marginally weaker than the market's expectation of a 1.3% qoq rise. This follows growth of 2.1% qoq and 2.2% qoq during the previous two quarters.

Strong motor vehicle sales played a leading role in the strong Q2 result. Excluding sales in the automotive sector, the volume of retail sales rose 0.8% qoq.

Retailers' stock-to-sales ratio remains at a comfortable level. The 1.1% qoq rise in the retail trade deflator during Q2 means that the annual rate of retail trade inflation edged up from 1.9% to 2.0%. However, our current CPI forecast implies retail trade inflation of just 0.1% qoq in Q3.

Darren Gibbs, Senior Economist

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