Consumers finding their feet, but slowly

New Zealand: consumers finding their feet, but slowly

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Retail sales in New Zealand bounced back in March, rising 0.5%m/m (J.P. Morgan: 0.9%, consensus: 1.1%), after a disappointing drop of 0.6%m/m in the previous month. Two thirds of retail industries recorded an improvement in sales over the month. The rebound, though, was less than we (and the market) had expected.

Core sales more than recovered the ground lost last month, bouncing 1.1%m/m after slumping 0.9% in February. While the turnaround in core sales is welcome, the complexion of the quarterly print shows that consumers remain hesitant In 1Q, quarterly sales values were up a respectable 0.5%q/q, but core sales rose slid 0.7%q/q, with discretionary areas of spending like bars and clubs (-4%), cafes and restaurants (-3.5%), personal and household goods hiring (-10.6%), and recreational goods retailing (-1.6%) all weak. Lower food prices did depress quarterly sales in value terms, with supermarket and grocery store sales down 1%q/q, and fresh produce retailing down 1.5%. But demand was also weak in volume terms. Core sales contracted 0.5%q/q in 1Q - only a surge in motor vehicle retailing (up 4.2% on the quarter) pushed total retail volumes into the black, up to 0.2%q/q.

In March, the continuing softness in food prices pushed down fresh produce retailing (-1.2%m/m), and accommodation (-0.8%m/m) and cafes and restaurants (-0.3%m/m) were sluggish, as in the quarterly print. On the positive side, department store sales did register a sharp rise over the month, jumping 6.8%, and the largest category, supermarket and grocery store sales, rose 0.7%m/m. Around 45% of the value of core retail sales comes from the five food-related industries - supermarket and grocery stores, fresh produce retailing, takeaway food retailing, other food retailing, and cafes and restaurants – so, with the outcomes within these categories being somewhat of a mixed bag, it is not surprising to see a middle of the road outcome for total sales over the month.

While the detail in the March sales print shows a mild strengthening of the recovery in household demand, the 1Q data as a whole shows a consumer lacking conviction. Households remain uncertain, in particular, about how the Budget (released next week) will address the tax treatment of the housing market, and rising petrol prices are hampering discretionary spending. This week showed a very substantial fall in credit card spending for April (-1.7%m/m), which also suggests we will see a further deterioration in retail sales near-term.

The biggest support for consumer spending is coming from the labour market, which is substantially healthier than was earlier anticipated: last week’s stunning employment report showed a drop in the unemployment rate of over 1%-point. Seasonal factors definitely were influential, which diminishes the implied momentum of the recovery. But, we would say that the 1Q data shows a labour market that has been at least stable for the last 6 months. It is this sense that the recovery is steady, if not brisk, that supports the case for removal of extraordinary stimulus by the RBNZ. We forecast the RBNZ to begin the tightening cycle with a 25bp hike in July.

ENDS

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