Retail Sales (December and Q4 2001)
Data Flash (New Zealand)
The value of retail sales rose 0.8% mom in December - stronger than the market's expectation of a 0.3% mom rise. Excluding motor vehicles sales and services, sales also rose 0.8% mom. Reflecting increased activity in the housing market, furniture and appliance sales contributed strongly to this month's outcome (both categories rose by around 3.5% mom). Motor vehicle sales also rose a further 1.8%, offsetting a decline in motor vehicle services (the latter probably due to lower petrol prices). Cafe sales continued to languish as a result of the decline in tourist arrivals.
Over Q4 as a whole, the value of total retail sales increased 2.0% qoq. Surprisingly, the retail trade deflator fell 0.1% qoq compared to our estimate of a rise of 0.3% qoq (a fall we are struggling to explain). As a result, the volume of retail sales - representing around 40% of private consumption - rose 2.1% qoq to be 5.4% higher than a year earlier. This is the fastest rate of quarterly growth recorded since Q3 1999.
This outcome was much stronger than either the market or we had expected (Mkt 1.1% qoq, DB 1.4% qoq). This reflects both an overestimation of the retail trade deflator (for example, many in the market had expected the retail trade deflator to rise in line with the 0.6% qoq movement in the CPI) and an underestimation of the underlying strength of consumer demand in the closing months of 2001.
A 7.4% qoq rise in motor vehicle sales made a substantial contribution to the overall result, as did a 2.1% qoq rise in sales of motor vehicle services. Excluding motor vehicle sales and services, `core' retail sales volumes rose by a more modest, yet still robust, 0.8% qoq to be 3.1% higher than a year earlier. Strong contributions to growth in core sales were made by storetypes selling furniture and appliances, and personal and recreational goods.
On a regional basis, strong growth was recorded across the country. However, the strongest rates of growth were seen in the Waikato Regional Council area (+3.9% qoq) and the Auckland Regional Council area (+2.3%). Sales in the Wellington Regional Council Area continue to lag those elsewhere, posting a rise of 1.2% qoq.
Retailers' stock-to-sales ratio remains at a comfortable level.
Today's retail sales outcome - the first major GDP partial - adds to the range of anecdotal and official information suggesting that, following an electricity-crisis-impacted Q3, the domestic economy regained momentum in Q4, notwithstanding the reported decline in consumer and business optimism post 11 September. It appears that post 11 September uncertainties have been offset by a combination of lower interest rates, lower oil prices, a rise in activity in the housing market and the lagged impact of past income gains, in the farming sector in particular.
We remain more than a little sceptical that such growth can be sustained in the near-term in light of our expectations for the external sector, which is now feeling the impact of declining commodity prices, as well as weak global demand. Nonetheless, even with some slowing from the rate of growth seen in Q4, early 2002 is shaping up to be more robust than we had feared in the aftermath of the 11 September attacks.
As noted, strong growth in motor vehicle sales made a substantial contribution to overall growth. Given that New Zealand imports all of its motor vehicles, the contribution to GDP from this growth is less than otherwise (essentially, the GDP value added is simply the retail margin on the vehicles, or put another way, the incomes and profits earned by vehicles salespeople and their employers). Nonetheless, today's figures suggest that our preliminary GDP forecast of 1.0% qoq - already above that mooted by many of our competitors - is subject to upside risk, with our back of the envelope calculations suggesting that growth of 1.2-1.3% could prove closer to the mark. Around 0.4pps of that growth reflects a bounceback from the electricity-crisis-impacted Q4.
Without any doubt, demand in the economy is running hotter than the RBNZ had expected when it decided to ease by 50bps in November. That decision was founded on the belief that the economy would grow by just 0.6% in H2 2001, rather than the growth of 1.5% which now seems possible according to our estimates. The key judgement for the Bank is whether stronger than expected demand has been offset - at least partially - by stronger than anticipated growth in the economy's productive capacity, and how demand and productive capacity are likely to track over the course of 2002.
Certainly, last week's Household Labour Force Survey suggested that growth in the labour force was more than sufficient to meet the increased demand for labour (as indicated by the rise in the unemployment rate). On a similar tact, the NZIER's QSBO has pointed to an easing of pressures on skill shortages in recent months while wage and inflation indicators have, in general, have been reasonably well-haved (although some indicators remain a little higher than their medium-term trend). However, going forward, with the risks stemming from the global economy now receding, and the economy appearing likely to begin the global upswing in better shape than we thought likely, the case for maintaining monetary settings at such unambiguously easy levels is receding. The bottom line is that the prospects of an earlier rate hike - say at the May Monetary Policy Statement - are likely to have risen as a result of today's release. We still favour an August move (just), but a 25bps move in May or a more aggressive first-up move of 50bps in August should be considered very realistic prospects if risks to the global international outlook continue to recede and the domestic economy maintains it current momentum.