NZ: Q1 Retail Sales Exceed Market Expectations

Key Points

The value of retail sales rose 0.9% mom in March, slightly stronger than the market's expectation of 0.7%. Excluding motor vehicles sales and services, sales rose 0.7% mom. Total retail sales had also increased 0.9%mom in February. Taking Q1 as a whole, the value of sales increased 1.8% qoq. The retail trade deflator rose 0.3% qoq to a level 4.3% higher than a year earlier. As a result (and allowing for rounding), the volume of retail sales - representing over 40% of private consumption - rose 1.4% qoq. The median market expectation was for a 0.5% qoq increase.

Excluding motor vehicle sales and services, retail sales volumes rose 0.6% qoq to be 2.8% higher than a year earlier. Most storetypes contributed to the strong result, with the exception of food retailing, appliance sales and `other' stores, which recorded lower sales (discussed further below). Motor vehicle retailing rose for the first time since Q1 2000, while motor vehicle services rebounded strongly to more than surpass the declines reported over the previous six months.

The strongest percentage growth in volumes occurred in the recreational goods (+5.3% qoq) and motor vehicle services (+4.3%) storetypes. Sales in the accommodation and cafe and restaurants storetypes also grew strongly, reflecting the ongoing impact of double digit growth in tourist arrivals. On a regional basis, with the exception of Canterbury Regional Council Area (which had recorded 3% qoq growth during the previous quarter), strong growth was reported across most of the most of the country, and especially in the North Island (where sales rose 2% qoq in nominal terms). Sales in the Waikato Regional Council Area rose 4.5%qoq, reflecting the huge lift in rural sector incomes.

Retailers' stock-to-sales ratio remained at comfortable levels.

Commentary

Though in line with our expectations, the strength of today's result was somewhat of a surprise to the market (especially those commentators pointing to weak domestic demand as a reason for a 50bp easing by the RBNZ yesterday). Thus we continue to expect Q1 GDP growth of around 0.8% qoq.

Importantly, the outcome is consistent with the robust view of H1 2001 consumption portrayed in yesterday's RBNZ's Monetary Policy Statement.

In our view, this result fits neatly with a range of other indicators which point to a lift in domestic demand since Q4. These indicators include: a strengthening secondary housing market (April data due shortly should signal a further lift); stronger growth in the narrow monetary aggregates (although partly driven by special factors affecting velocity); a return to positive levels of consumer confidence (although confidence has weakened a bit over the past two months); and strengthening car registrations (which have recorded growth in each of the last 5 months with an especially strong increase reported in April). Although ex-auto retail sales rose less rapidly than total sales, this result was driven largely by a decline in food and appliance sales - most other store-types recorded very robust growth. Food sales are very likely to rebound in Q2, while sales of appliances are expected to recover in line with modest growth in house sales (see chart below).

Indeed, even with only modest growth over the next three months, we foresee a further robust outcome when the Q2 outcome is published in mid August. Today's data supports our view that, all other things equal, the RBNZ will be quite reluctant to ease rates again when it next reviews the OCR on 4 July, especially with a range of important data due for release between its July and August reviews.

The prospect of further easing at the 15 August meeting would be enhanced by: a downward revision to consensus forecasts of global growth (especially as regards 2002); a sharp fall in the prices obtained for New Zealand commodity exports (the RBNZ already expects a gradual decline); a stronger than expected performance by the NZD; continued weakening in business and consumer sentiment; and a benign outcome when the next round of CPI and labour market data is published in July/August. For this reason, a further modest reduction in the OCR - while not expected at this stage - can not be ruled out.

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