Core retail spending growth in May strongest since Feb 2007 (Update 1)

Seasonally adjusted core retail spending grew 1.6% or NZ$65 million to NZ$4.102 billion in May, making it the fastest growth in any one month for most retailers since February 2007, Statistics New Zealand figures show. Grocery and clothing sales grew the most, while car sales and petrol sales fell. (Updated with comments from JP Morgan's Helen Kevans and ASB's Jane Turner) The figures reinforce initial signs of green shoots in the consumer economy as the housing market stabilises and New Zealanders resume borrowing and spending again because they are more confident about the value of their homes. Reassurance about these green shoots is likely to encourage the Reserve Bank to keep its Official Cash Rate on hold at 2.5% on July 30. Total seasonally adjusted retail sales rose 0.8% or NZ$41 million after a 1.8% drop in sales for the automotive related sales. This was the largest increase in total sales since October 2007. JP Morgan's Helen Kevans said the sales were unexpectedly strong, rising 0.8% when the consensus was for a 0.2% rise and her forecasts was for a 0.2% fall.

We have our doubts, though, as to whether such strong retail numbers will be sustained. It appears that New Zealand retailers suffered a big setback in June, with data last week showing that monthly electronic card transactions slumped 1.2%m/m, marking the biggest monthly drop in the core retail sales figures since October 2007. Total electronic card transactions were down 0.4%m/m, while all retail industries (including fuel and automotive) were down 1%. Widespread anxiety about job security will throw another spanner in the works. Rising unemployment probably is the biggest headwind facing consumers and, with the business surveys pointing to more firms shedding workers, the unemployment rate will continue to rise "“ on our forecast, approaching close to 8% in 2010. The resulting fall in labour income, combined with rising petrol prices, will eat into households' disposable incomes, supporting our view that private consumption will contract in 2009. Net migration and signs of stabilization in the housing market should soften the blow. A Roy Morgan survey (released earlier today) showed that consumers are less pessimistic about their future wealth, thanks to lower interest rates and recent signs of stabilization in the housing market. Housing market turnover has increased and other indicators, such as home loan approvals, are pointing to signs of recovery. Consumers also should feel fairly confident that the cash rate will remain near or at record lows for the remainder of the year. We believe that the OCR already has bottomed at 2.5% in the current easing cycle, but the next move won't be for a while yet, with our forecast calling for the RBNZ next rate move to be a hike in mid-2010.

Clothing sales recorded a whopping 12.6% increase over the month, possibly due to the early timing of winter sending shoppers to stock up on winter woollies one month earlier than usual. While clothing was a stand out, strength was also evident in appliance and hardware retailing. These categories are tied to the housing market, and some improvement likely came on the back of some recovery in house sales over April and May. Electronic card transaction data suggests that the strength over May was likely to be a one off, pointing to a fall in spending over June. This pattern would be consistent with bad weather bringing forward winter related purchases. There were some tentative sign of housing related spending picking up, although this is from a low base and the pick up in housing demand has been relatively modest to date. Looking through the clothing one-off and housing related spending, the retail trade survey suggests that underlying consumer demand remains reasonably subdued. Despite tax cuts and lower mortgage rates, consumer sentiment remains relatively benign as households adjust to a fall in net wealth and a less secure employment outlook. Precautionary saving is increasing, at the expense of discretionary spending (vehicle purchases in particular). The RBNZ's key concern now lies with the business sector and exporters, who are contending with the recent pick up in the NZ dollar. We expect the RBNZ will keep the cash rate on hold at the July OCR review, although see scope for further cuts possibly in September and October.