Q1 Retail Sales and Monetary Policy Review

Data Flash (New Zealand) Q1 Retail Sales and Monetary Policy Review

Key Points

Retail sales (nominal, s.a.) were flat in March, following +0.9% and -0.7% results for the preceding two months. Taking Q1 has a whole, sales increased by an overall 1.0% relative to Q4.

In unadjusted terms, the value of sales in Q1 was up 7.2% on the same quarter a year earlier. However, in seasonally adjusted terms, the value of sales was up just 6.1% over the year. The difference largely reflects the downward adjustment of the Q1 seasonally adjusted data to remove the impact of February's leap day.

The retail trade deflator rose 0.8% in Q1.

The 1.0% rise in nominal sales combined with a 0.8% rise in the retail trade deflator implies that the volume of retail sales grew 0.2% in Q1 compared to Q4 (compared with a market average of 0.4%). However, volumes were 4.6% higher than the same quarter a year ago.

The storetypes to record the strongest percentage growth in volumes during the quarter were motor vehicle retailing (3.0% qoq), clothing (3.6% qoq), footwear (4.7% qoq) and recreational goods (3.9%). The largest falls in volume were recorded for the chemist (-3.9% qoq), furniture (-2.8% qoq) and other stores (-2.8% qoq) storetypes.

Excluding motor vehicle sales and services, retail sales volumes fell 0.3% qoq but were up 3.8% yoy.

Commentary

In our view the weak result for retail sales represents a consolidation of spending levels following the very strong growth recorded over the second half of 1999 (over 7% annualised).

Going forward, we expect that high levels of consumer confidence and rising incomes will underpin robust growth in retail sales. In our view, the general economic and policy environment is supportive of strong levels of economic growth.

While interest rates have risen and are expected to rise further, at present they remain significantly below levels experienced during the last cycle (though higher household debt levels means that the braking power of rises in interest rates is likely to have increased).

In a speech given last week, Finance Minister Cullen indicated that the coming Budget will see the front end loading of a large part of the $5.9 bn increase in government spending foreshadowed in the Budget Policy Statement.

The exchange rate is forecast to remain at levels that are very competitive by historical standards. We expect the persistence of the NZD at low levels to stimulate increasing growth in export volumes.

The export picture is also strengthened by a very positive outlook for world growth. We are now forecasting world growth of 4.8% in 2000 and 4.3% in 2001.

The implication of today's result for Q1 GDP depends on how Statistics NZ treat the impact of the extra leap day. The seasonally adjusted retail trade data included a downward adjustment to account for the extra trading day. However, at present, Statistics NZ are yet to decide whether to apply a similar adjustment to the GDP estimates (due 26 June).

In the absence of any leap year adjustment, today's outturn is consistent with consumption growth of around 0.8% qoq and leads us to an initial GDP estimate of 0.6% qoq. A decision by Statistics NZ to adjust the GDP data for leap year effects would lead us to lower these estimates significantly.

Importantly, the statistical treatment of the leap year effect has no impact on our view of underlying trends in the economy.

Looking towards next week's Monetary Policy Statement, we expect that the RBNZ will have largely anticipated today's retail trade outturn. We expect the Bank to remain focused on the medium-term picture of already tight constraints on capacity and skilled labour, continued robust levels of economic growth both in New Zealand and abroad, and pressures on import and export prices from rising commodity prices and the weak NZD. Therefore, on balance, we continue to expect the Bank to raise the OCR by 50 bps.

Monetary Policy Review

The Government has announced the terms of reference for its long awaited monetary policy review (reproduced below). The announcement produced no great surprises with the primacy of inflation as the sole objective and the operational independence of the RBNZ excluded from the terms of reference. In our view, the outcome of the review will largely depend on who is selected as reviewer. At this stage no announcement has been made, other than it will be someone with technical expertise from outside New Zealand. We expect the reviewer to be identified in several weeks.

Government announces terms of monetary policy review

"The aim of the monetary policy review is to investigate ways of enhancing the Reserve Bank's ability to implement the PTA with minimal disruption to the economy," Finance Minister Michael Cullen said today.

"The Reserve Bank Act has been in effect for a little over ten years now and has been effective in combating inflation. I supported its introduction and continue to support its intentions.

"But it is appropriate to examine the Reserve Bank's operations and governance to ensure it has the tools it needs to do its job as effectively as possible with least volatility to interest rates and the exchange rate," Dr Cullen said.

"The terms of the review are strictly limited. The Government is strongly committed to maintaining the operational independence of the Bank and to Section Eight of the Act defining the maintenance of price stability as "the primary function of the Bank."

"These areas have been fenced off from the review," Dr Cullen said.

The review would be technical in nature and would require a person with a high level of expertise. It was the Government's intention to appoint a reviewer from overseas.

"We are now in the process of finalising the appointment and should be in a position to make an announcement soon," Dr Cullen said.

The review will consider:

*The way the Reserve Bank interprets and applies the inflation target set out in the Policy Targets Agreement with a view to ensuring that this approach to achieving medium term price stability is consistent with avoiding undesirable instability in output, interest rates and the exchange rate.

*Whether the Reserve Bank has an adequate range of instruments and is using its current instruments effectively in altering monetary conditions in the desired direction.

*The range of sources, availability, type and timeliness of data, and the impact of these variables on forecasting and decision making.

*Whether the policy decision making process and accountability structures promote the best outcomes possible.

*The co-ordination of monetary policy with other elements of the economic policy framework, including an evaluation of the relationship between monetary policy operations and other Reserve Bank functions such as prudential oversight of financial institutions.

*Whether the Reserve Bank's communication of monetary policy decisions to the public and financial markets is as simple, clear and effective as possible.

"The total cost of the review, including the cost of using existing resources, is expected to be between $200,000 and $500,000.

"Recommendations arising from the review will be discussed with the Reserve Bank Governor, Dr Don Brash, before the Government makes any decisions on how to proceed," Dr Cullen said.

Darren Gibbs, Senior Economist (64) 9 351 1376

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