NZ Retail Sales (Q4) 2000 and Trade Balance (Dec)

Data Flash (New Zealand)

NZ Retail Sales (Q4) 2000 and Trade Balance (Dec)

Key Points - Retail Sales

The value of retail sales rose 1.0% mom in December, a slight upward revision to the advance estimate of +0.7% mom. Excluding motor vehicles sales and services, sales rose 1.2% mom. The latest result, which followed two months in which sales levels had been broadly flat, may be indicative of the beginnings of a pickup in household spending, backed by strong income growth and improving levels of consumer confidence.

Taking Q4 as a whole, the value of sales increased by 0.9% qoq relative to Q2. However, increased prices more than accounted for the increase in nominal sales. The retail trade deflator rose 1.4% qoq to a level 4.8% higher than a year earlier.

As a result, the volume of retail sales fell 0.5% qoq, compared to the median market expectation of a 0.3% qoq fall. The volume of sales was just 0.2% higher than a year earlier.

Excluding motor vehicle sales and services, retail sales volumes fell 0.1% qoq but remained 1.7% higher than a year earlier. The difference compared with the overall result reflects a sharp fall in motor vehicle sales over the first three quarters of 2000 and a sharp fall in sales of motor vehicle services in the final quarter (likely reflecting lower petrol consumption due to high petrol prices).

On a storetype basis, a significant contribution to the fall in retail sales was made by the furniture and floorcoverings (-6.4% qoq) and household appliance (-3.8% qoq) storetypes. As noted in previous commentaries, once `beat the price rise' spending subsided, a decline in these storetypes was inevitable given the decline in housing market activity over the past year.

The strongest percentage growth in volumes occurred in the hardware (+2.3% qoq) and cafe and restaurants (+2.2% qoq) storetypes. A 0.8% qoq rise in food retailing made the largest upward contribution to the overall result. Continued strong growth in tourist activity is likely to explain the growth recorded in food sales.

On a regional basis, the strongest quarterly outcomes were recorded in the Canterbury region and in the non-metropolitan North Island regions. This is consistent with a rural/export led recovery in domestic demand.

Key Points - Merchandise Trade

The final trade balance for December was a deficit of $58m, little changed from the earlier estimate released last month. The deficit for the year to December was $1,537m.

The final release contains the first detailed breakdown of exports for the month and estimates of the seasonally adjusted movements in key exports for Q4 as a whole. The latter shows a very strong surge in exports across a broad range of categories that can only partially be explained by price movements. For example, exports of non-food manufactured goods increased by 8.9% qoq, milk powder, butter and cheese rose 15.4%, and meat exports rose 19.6%. As discussed below, this strong result helps to reconcile seemingly buoyant levels of activity in the labour market despite weak retail spending and housing market activity.

Commentary

The Q4 retail volume result was close to our own forecast of -0.6% qoq (we had anticipated that the movement in the retail trade deflator would exceed the CPI). We estimate Q4 GDP growth of 0.7% qoq, driven by extremely strong growth in export volumes (perhaps as much as 6% qoq).

Looking over the immediate period ahead, there is some risk that the pickup in economic growth catches the market by surprise. Over the past year, income growth has significantly outstripped growth in consumer spending. We estimate that this has resulted in a 2 percentage point rise in the household savings rate, explaining more than half of the improvement in the current account deficit (the remainder of the improvement reflects stronger savings in the corporate sector). Given improved confidence levels, we would not be surprised to see a strong rebound in consumer spending. The much-improved retail sales outcome for the December month and anecdotal evidence of a quite significant improvement in activity in the housing market might foreshadow such an outcome. An increase in retail volumes of 1% qoq in Q1 certainly seems achievable. We remain of the view that the RBNZ is quite unlikely to cut its official cash rate on 14 March, with the prospects of a weaker international economy balance by the possibility of a much stronger than expected pickup in domestic demand. A rate cut at the 16 May Monetary Policy Statement remains a possibility if data continues to challenge the consensus view that the US will enjoy a `V-shaped' economic recovery later this year.

Darren Gibbs, Senior Economist, (64) 9 351 1376

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