Retail Sales - October 2001

Data Flash (New Zealand)

Key points

Total nominal retail sales fell 0.1% mom in October but were 5.6% higher than a year earlier (the unadjusted series, which is impacted by differences in the composition of trading days in each month, rose 7.0% yoy). The market had expected growth of 0.4% mom.

Weakness was fairly broad-based with nine of the thirteen non-automotive store-types recording lower nominal sales in October. Sales in the furniture storetype rose 3.9% mom for the second consecutive month, presumably reflecting the relative buoyancy of the housing market.

As suggested by motor vehicle registrations, motor vehicle sales rose 2.2% mom in October, reversing the decline recorded over the previous two months. The 1.4% mom decline in motor vehicle services is likely to have been influenced by an estimated 4% decline in average petrol prices. Excluding motor vehicle sales and services, retail sales fell by modest 0.3% mom and were 6.0% higher than a year earlier.

On a regional basis, sales declined in all regions apart from the Wellington Regional Council area.

Commentary

We had forecast a 0.3% decline in total sales and a 0.5% decline in sales excluding motor vehicle sales and services. Therefore, today's outcome was broadly in line with our view and, therefore, has no implications for our view regarding GDP growth in Q4 (which remains 0.4% qoq, following an estimated 0.5% qoq in Q3). Over the first half of this year, retailers have benefited from strong growth in household incomes (driven by higher wage and salary movements, extremely buoyant farm incomes and growing employment levels), robust levels of consumer confidence and rapid growth in tourist arrivals. These positive influences appear likely to be less significant in the months ahead:

Today's ANZ job ads survey confirms that employment growth is weakening;

Given a weakening labour market, wage growth is unlikely to rise further and may decline somewhat;

Farm incomes are being impacted negatively by falling world prices for New Zealand's agricultural exports (overtime, this appears likely to more than offset the benefit still being derived from more favourable foreign currency conversion rates as hedging contracts roll off);

Consumer confidence deteriorated post 11-September and remains in negative territory; and

Tourist arrivals have declined by 16% over the past two months. Relative to last year, the tourism sector is expected to be a drag a retail activity over the next six months.

Given the above factors, it is perhaps not too surprising that retail sales growth has slowed in recent months. In our view, retail activity is likely to remain relatively sedate over the next six months.

Importantly, the RBNZ's November MPS projections already factored a very weak Q4 (both for consumption and the economy as a whole) and thus today's result should have been of little surprise.

While further easing by the RBNZ remains a realistic prospect - we attach a 30% probability to a further cut in the first quarter of next year - it remains our central view remains that the RBNZ will not ease further during the current cycle. However, we and the Bank will continue to monitor the emerging data for signs that the Bank's gloomy November MPS predictions might still prove too optimistic (today's ANZ job ads might be one such indicator). Should strong signs of a deeper downturn emerge and inflation indicators remain friendly - especially those measures most closely linked with the RBNZ's concept of persistent inflation - we believe the RBNZ will not hesitate to ease further.

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