Strong retail headline masked underlying weakness

New Zealand: strong retail headline masked underlying weakness

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Retail sales values spiked in New Zealand in January, but the headline masks a relatively weak picture of consumer spending. Sales values were up 0.8%m/m (J.P. Morgan: 0.2%, consensus: 0.5%), after falling 0.4% in December (revised down from zero), with the upside surprise in sales driven by the vehicle-related industries, thanks to continual gains in petrol prices (see chart). More importantly, core sales were up just 0.3%m/m (J.P. Morgan: 0.2%, consensus: 0.7%), after tumbling 2.0% in the previous month, which marked the largest decline on record.

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Automotive fuel retailing was up 2.8%m/m in January and motor vehicle retailing up 2.0%. Removing the auto-related industries, core retail sales rose just 0.3%, with only two industries recording increases of more than NZ$5 million - recreational goods retailing and accommodation. Low interest rates and solid net permanent migration flows probably prevented an even weaker reading on the core measure.

Indeed, the retail sales report was less than impressive, even though at first glance the headline retail measure shot above expectations. The weakness in core retailing reaffirms our view that any recovery in consumer spending this year will be relatively benign. With housing market activity moderating and labour market conditions weak, households will remain cautious. Add to this the recent rises in petrol prices and the expected increase to the GST to 15% in October, and the retail environment won’t be a favourable one. Petrol prices were pushed up to 5 cents higher at a number of outlets in New Zealand this week, with the latest rises meaning that petrol prices are up 8 cents since the beginning of the month, which will eat into households’ disposable incomes.

Additionally, further evidence that housing market activity is easing came to hand this morning. The REINZ reported than house prices rose a mere 0.4%m/m in February, the median number of days to sell a house again headed higher (from 43 to 46), and home sales fell 3.8%oya. With housing market activity pulling back, and with credit growth still subdued, the RBNZ should be confident that another debt-fueled housing bubble will be avoided.

For reasons as such, we maintain our call that the first rate hike will be a 50bp move in July. RBNZ Governor Alan Bollard appears to want hard evidence that the recovery is sustainable; thus, we believe the RBNZ will sit on the policy sidelines until after the late-June release of the 1Q GDP report. The RBNZ expects first quarter growth of 0.9%q/q, slightly higher than our own forecast of 0.8%.

ENDS