Retail Sales Values Slump

Retail Sales Values Slump

·        Retail sales values slumped 1.1%m/m
·        Ex-autos sales were up 0.3%m/m
·        Tax cuts will cushion the downside

Retail sales values in New Zealand slumped 1.1%m/m in January (J.P.Morgan 0.0%, consensus -0.1%)  after falling 0.7% in December (revised up from -1.0%). The decline was driven by a sharp fall in vehicle-related industries, with car sales down 11%m/m and automotive fuel retailing down 2.6% in January. Ex-auto sales rose 0.3%m/m.

Outside vehicle-related industries, the largest falls were recorded in appliance retailing (-6.6%) and sales of furniture and floor coverings (-4.2%). Significant increases in sales were recorded at supermarkets and grocery stores (+1.7%), which make up one fifth of the retail sales index. Recreational goods retailing was up a solid 5.2%, and other retailing was up 3.9%.

The retail sales trend continued to decline (-0.4%) as it has done since January last year, marking the most prolonged period of decline on record. This trend will continue, and household spending will fall around 0.5% in 2009, with only the forthcoming tax cuts in April and lower interest rates preventing an even larger decline than currently forecast.

The tax cuts will give a worker on the average wage (between NZ$48,000 and NZ$78,000) an extra NZ$18 a week. In our view, though, a significant portion of the tax cuts will be saved - consumers have become increasingly reluctant to spend amid widespread recession fears and heightened anxiety about job security. Indeed, heightened anxiety about job security is warranted, with our forecast calling for an unemployment rate of 7% by year-end.

Lower interest rates should also soften the blow to consumers, however. Weak consumption growth, sagging domestic house prices, the falling terms of trade, and rapidly falling inflation, provide ample scope for the RBNZ to ease policy assertively. That said, the RBNZ has signaled clearly that future rate cuts will be smaller than those recently delivered. We look for only a 25bp rate cut at each of the next two policy decisions in April and June, which will take the OCR down to 2.5%, which we believe will be the terminal cash rate in this easing cycle.

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