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Data Flash Retail Sales (March And Q1 2002)

Data Flash (New Zealand) Retail Sales (March And Q1 2002)

Commentary

Today's retail sales data, in conjunction with yet another survey pointing to a downward correction in consumer confidence, suggest that the consumer demand cycle may have moved beyond its peak. While the overall March quarter retail result was strong (up 2.2% qoq), it merely confirmed other indicators, which had already pointed to strong GDP growth for that period (our GDP estimate: +1.3% qoq). It should be noted that the Q1 retail result was driven by activity in January and February. A downward correction was recorded for the March month and today's consumer poll published in the National Business Review confirmed a recent deterioration in consumer sentiment recorded by the TV1 and TV3 polls. That trend is not surprising, considering recent increases in interest rates and a marked deterioration in the outlook for farm incomes. Furthermore, while employment growth has been robust, the upward trend in wage inflation seems to have stalled.

Going forward, the actual reduction in farm incomes, as well as a plateauing and likely downward correction in the migration cycle, is expected to drive a natural slowdown in consumer demand growth. Given those forces, and taking into account the high level of household indebtedness, the case for a more aggressive RBNZ tightening cycle is weak. We continue to expect the RBNZ to raise the OCR next week by 25 bps. In its April statement the Bank said that the economy had broadly evolved as expected. It would be surprising if the Bank was coming to the conclusion that the data since then was justifying an accelerated tightening pace (i.e. a 50 bps move):

global data has been somewhat disappointing;

business confidence in New Zealand has peaked;

consumer confidence is moderating;

retail growth is slowing; and

wage inflation has surprised on the downside.

The only stronger-than-expected data related to employment growth. However, we would not expect the RBNZ to give over-proportionate weight to labour market data, which is widely recognised as a lagging indicator. Furthermore, it is important to note that employment growth over recent quarters has been matched by an increase in labour supply through migration and increased labour force participation. That implies that, while there is significant demand growth in the economy, this has been matched by an increase in the potential growth rate, which has an offsetting effect as far as inflation pressure is concerned.

The data

The value of retail sales fell by 0.8% mom in March, weaker than the market's expectation of a flat result. Excluding the automotive sector, sales also fell by 0.8% mom.

Statistics NZ noted that Good Friday and Easter Sunday fell in the month of March this year for the first time since 1997, which may have had a (so far unquantifiable) impact on the result for the March month.

The weak March result followed increases of 0.6% and 2.0% in January and February respectively.

Over Q1 as a whole, the value of nominal retail sales increased by 2.6% qoq. With an increase in the retail deflator of 0.4%, the volume of retail sales - representing around 40% of private consumption - rose 2.2% qoq, somewhat weaker than market expectations of +2.4%.

Q1 retail sales volumes were 6.2% higher than in early 2001. March quarter sales growth was relatively strong across all sectors, with some under-performance by the automotive sector. Motor vehicle retailing increased by only 0.8%.

Retailers' stock-to-sales ratio remains at a comfortable level.

Ulf Schoefisch, Chief Economist

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