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Retail Sales - August (Final)

Data Flash (New Zealand)
Retail Sales - August (Final)

Key points Total retail sales rose 1.1% mom in August, 0.4 percentage points weaker than the provisional estimate of 1.5% mom released on 21 August. Minor revisions were made to growth rates during earlier months.

A 2.7% mom increase in motor vehicle services made the largest positive contribution to growth during the month. This largely reflects higher petrol prices - we estimate that the average price of petrol rose by approximately 3.6% mom in August. A 2.0% mom increase in motor vehicle retailing made the second largest positive contribution, consistent with a bounce-back in motor vehicle registrations during the month. However, Statistics NZ note that the average landed price of motor vehicles over the 3 months to August increased by 7.8% compared with a year earlier. To date the CPI has shown little increase in new car prices at the retail level (and falling used car prices). However, we expect higher car prices to be recorded in the Q3 CPI.

Excluding motor vehicle sales and services, retail sales rose by 0.6% mom in July - slightly weaker than the 0.7% mom growth estimated in the provisional release. Increased sales in the department store and clothing and softgoods storetypes accounted for the rise. Sales in the hotel, accommodation and liquor storetype fell 2.9%. Monthly data at the storetype level is very volatile. Despite soft activity in the housing market, the furniture and floorcovering storetypes recorded 4% mom growth in August while appliance sales remained at high levels. This outcome is surprising given the very soft construction and house sales data in recent months. As discussed below, this may partly reflect the passing through of price rises as a result of currency weakness and the bring- forward of spending in anticipation of further price rises.

Total sales in the South Island grew 2.6% mom compared with growth of just 0.4% mom in the North Island.

Commentary Price increases are likely to be a significant factor underpinning growth in nominal sales. Given our forecast of a 1.3% qoq increase in the CPI in Q3, we estimate that the retail trade deflator will rise by close to 2% qoq. Assuming a flat result for retail sales in the month of September, overall nominal sales in Q3 would rise by around 2.5% qoq, pointing to around 0.5% growth in retail volumes.

Taking today's result at face value, the apparent continuation of volume growth despite low levels of consumer confidence and pressures on real disposable incomes is likely to reflect a number of factors.

Net tourist flows continue to remain very strong. Arrivals in the three months to August were up 13.7% yoy, whereas departures were up just 2.5% yoy over the same period. This effect is reinforced by increasing levels of spending per visitor (aided by the weak exchange rate).

With `beat the price rise' advertisements increasingly commonplace, we think that purchases of large durable items in particular are being pulled forward to some extent as households anticipate widely announced increases in prices as a result of the weakening exchange rate. As this process comes to an end, a renewed weakening in retail sales may occur. Data on September new car registrations released today show a 5% mom decline to a level 15% lower than a year earlier.

It is conceivable that price rises are even more widespread than our inflation forecasts for Q3 imply, so that underlying volumes are weaker than our figuring would suggest. The price/volume split for September quarter sales will be released with the September month retail sales on 7 November.

Taking today's data at face value, the risk that household consumption makes a significant negative contribution to GDP growth in Q3 appears relatively low. Given our expectation of a strong contribution to growth from net exports - dairy production has already made a very positive start to the season - we are comfortable with our forecast of a return to moderate levels of GDP growth in Q3 (our current estimate is for growth of +0.5% qoq), rather than a second consecutive quarter of negative growth as some commentators have suggested. A recovery in growth, combined with external pressures on inflation from ongoing weakness in the exchange rate, will likely force the RBNZ to hike rates further. However, as set out in a separate note today, given the RBNZ's obvious reluctance to change policy settings until the medium term outlook becomes somewhat clearer, the balance of risks has now shifted towards no change in the OCR on 6 December. Our view reflects the fact that, more likely than not, data scheduled for release over the next two months will be insufficient for the Bank to resolve its uncertainty about the medium-term inflation outlook (the Bank will begin to revise its economic and inflation forecasts within the next couple of weeks). Given that the medium term outlook for inflation is likely to remain unclear, and that lack of clarity explains the Bank's reluctance to move at recent meetings, a decision to the leave rates on hold on 6 December seems to be the most likely outcome.

Darren Gibbs, Senior Economist (64) 9 351 1376

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