NZ: 4Q GDP forecast downgraded after retail data

New Zealand: 4Q GDP growth forecast downgraded after quarterly retail data

• Retail sales slumped 1.0%m/m in December
• Ex-autos sales were down 0.6%m/m
• RBNZ to cut cash rate to 2.25% in this easing cycle

Retail sales values in New Zealand fell more than expected in December, declining 1.0%m/m (J.P.Morgan -0.2%, consensus -0.7%), after rising a revised 0.2% in November (previously zero). Rising unemployment and recession fears spooked consumer spending, even though confidence probably got some lift from lower interest rates, a small rise in equity prices, and falling petrol prices.

The decline in retail sales in the month of December was driven by a fall in automotive fuel retailing (-8.4%m/m), owing to lower petrol prices. The next largest decrease was for sales at supermarkets and grocery stores (-1.1%). The retail sales trend continued to decline (-0.2%), as it has done since January last year, marking the most prolonged period of decline on record.

Retail sales volumes over the fourth quarter were down 0.6%q/q, much worse than the 0.2% decline we had forecast. The biggest contributor to the fall in sales volumes was motor vehicle retailing (-4.9%q/q). The weaker than expected result has prompted a further downgrade to our fourth quarter GDP growth forecast from -0.5%q/q to a deeper contraction of 0.7%; this will mark four straight quarters of falling GDP.

The New Zealand economy already was in a homegrown recession before the recent international troubles unfolded. So the outlook for 2009 is even worse. Our forecast calls for GDP growth to contract 1.0% in 2009. Weaker export demand (owing to the worsening outlook for New Zealand's key trading partners), lower commodity prices, negative wealth effects from falling asset prices, and weaker consumer and business sentiment mean that the economy will be running on empty for some time. In particular, the outlook for household spending is extremely bleak. Consumers have become increasingly reluctant to spend amid widespread recession fears, still-elevated market interest rates, falling asset prices, and heightened anxiety about job security. Household spending will fall around 0.5% this year, with only the forthcoming tax cuts in April and lower interest rates preventing an even larger decline than currently forecast.

The problematic global economic and financial market outlook, sagging domestic house prices, the falling terms of trade, and rapidly falling inflation, provide ample scope for the RBNZ to ease policy assertively. We forecast that the RBNZ will cut the cash rate another 75bp in March to 2.75%, and a terminal cash rate of 2.25% to be reached by April.

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