NZ Retail Sales

NZ Retail Sales

The headline value of New Zealand's retail sales rose 0.1% in September (JPMorgan -0.6%, consensus 0.4%), but the all-important ex-autos measure slipped 0.5% (consensus +0.4%), after a 0.8% rise in August. Annual growth in nominal retail sales in the year to September was just 0.5%oya, down from 1.5%oya in the year to August, and an annual gain of nearly 7% as recently as last November. In real terms over the September quarter, the volume of retail sales fell 0.9%q/q (consensus -1.2%), after a 1.4% drop in Q2. In fact, this is the third straight quarter of decline. It seems the value of retail sales has been inflated by price gains for imported products - owing to NZD weakness - as volumes plunge.

Over the month of September, sales dropped in 15 of the 25 retail sales categories. Sales of motor vehicles bounced 3.5%m/m, mainly on the back of rising prices for imported cars owing to the plunge in the NZD, while sales of fresh produce rose 4.2%. There also was a large rise in sales of liquor (up 3.0%) and in spending in bars and clubs (up 3.2%). On the flipside, however, sales of footwear plunged 5.9%, department store sales fell 3.9%, and clothing sales dived 4.7%. Each of these outcomes betrays weakness in the more discretionary areas of retail spending.

The softness in retail spending is further evidence that New Zealand's economy is in the midst of what is likely to be a prolonged recession. The economy already has contracted for two straight quarters - we expect another three quarters of falling GDP, and the implementation of additional fiscal and monetary support in coming months. Our concern is that retail sales were this weak well before the onset of the worst of the latest bout of global financial market instability and asset price corrections. Retail sales almost certainly will deteriorate significantly in the final months of 2008. Falling house prices and job losses as firms act to cut costs make the outlook for household spending in the first half of 2009 particularly bleak.

The RBNZ already has cut official interest rates aggressively, and we expect substantial monetary easing in coming quarters too. We forecast a 100bp rate cut in early December and a terminal cash rate of 3.25% later in 2009, exactly half the prevailing rate of 6.5%. Elevated market interest rates, however, and falling asset prices remain significant drags on household spending. The personal income tax cuts promised by the newly-elected National Government may provide something of a floor for household spending, but these will be undermined to a large extent by low confidence, mainly because of increased anxiety about job security.

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