Retail sales figures show domestic recovery firming as Reserve Bank wanted, but global risks still mean OCR on hold until December, economists say

By Alex Tarrant

Better than expected retail sales figures for the June quarter suggest the domestic recovery was well-under way through the first half of the year, one of the prerequisites identified by Reserve Bank Governor Alan Bollard for a resumption of hikes in the Official Cash Rate.

But global growth worries still have economists picking the next OCR hike on December 8, rather than previous expectations for a September hike, as markets remain wary about sovereign debt crises in the US and the Eurozone.

Figures released by Statistics New Zealand show overall retail spending volumes (values adjusted for price rises) rose 0.9% during the June quarter, boosted by a resumption in spending in Christchurch, spending in vehicle-related industries and on electronic goods. Markets had been expecting an increase of 0.6% in sales volumes over the quarter, according to JP Morgan economist Helen Kevans.

The value of sales rose 1.7% during the quarter, with price rises taking the rise in sales volumes back to 0.9%. That built on 1.1% growth in sales volumes in the March quarter, pointing to an improvement in underlying household demand over the first half of the year, ASB economist Christina Leung said.

Retail spending would keep improving over the coming year as consumer confidence grew, Leung said.

These figures were released the same day as Stats NZ figures showing food prices rose 7.9% in the year to July - up from a 3.8% increase in the year to January 2011.

Reserve Bank governor Alan Bollard indicated in July that the central bank would look to remove March's 50 basis point 'insurance cut' in the OCR to 2.5% if domestic conditions continued to improve, and if global economic risks receded. This was taken by economists at the time as pointing to an OCR hike to 3% at the RBNZ's next monetary policy statement on September 15.

However, the downgrading of the US sovereign credit rating recently by Standard & Poor's, and fresh concerns about the Eurozone sovereign debt crisis have economists here again picking a December hike, as New Zealand's major trading partners deal with the volatiliy on global markets.

Encouraging spending figures

"In regards to the possible effects of the earthquake, Stats NZ note that nominal sales of hardware, building and garden supplies were much stronger in Canterbury (+10%) than the whole of the country (-0.3%), in particular, businesses selling building supplies," Leung said.

"While we have yet to see a meaningful pick up in the rebuilding process in Christchurch, the data suggest there is a lot of work on temporary or permanent repairs throughout the city over the quarter," she said.

"Encouragingly, there continues to be an improvement in discretionary spending, as reflected in higher sales volumes of electronic goods, apparel and in department stores. There have been anecdotes of households buying new large-screen televisions ahead of the Rugby World Cup, and this may have underpinned the whopping 10% increase in sales volumes of electronic goods in Q2."

Spending on accommodation and food and beverage services edged up slightly over Q2, with ASB expecting the Rugby World Cup would provide a further boost to activity in the hospitality industry over the second half of 2011.

"Sales volumes of motor vehicles and parts continued to recover. This is particularly impressive in light of the Japanese natural disasters earlier this year, which have limited the number of car imports into NZ in recent months. More recent vehicle registrations data suggest the recovery in car sales may slow over the remainder of 2011. Meanwhile, sales volumes of fuel once again fell. It is likely higher petrol prices over the past year have led households to make changes to their driving behaviour," Leung said.

What it means for interest rates

Today’s result added to the recent run of domestic data showing a continued recovery in underlying activity in the NZ economy, Leung said.

"Employment demand and housing market activity has shown encouraging signs of recovery over 2011, and this has underpinned a rebound in consumer confidence. We expect this will flow through to a continued improvement in retail spending over the coming year," she said.

"Indeed, the RBNZ has expressed greater confidence the domestic recovery is gaining a firmer footing. However, with global risks continuing to dominate market attention we expect the RBNZ will hold off taking back the 50bp insurance cut until December this year."

Kevans said the strength in consumer spending was attributable to firms’ pricing behaviour, low interest rates, tightening labour market conditions, and the recent rebound in confidence.

"Indeed, while firms are only slowly passing on higher costs to consumers, record low interest rates and the improving income backdrop, with wages pushing higher and the impact of the consumption tax hike last year beginning to fade, also are supporting the household sector," Kevans said.

"Further, the rise in consumption also has coincided with a rebound in consumer confidence following the earthquakes and consequent aftershocks that struck in Canterbury in February. In fact, domestic conditions have now improved enough for New Zealanders to feel more positive about their own prospects, with last week’s ANZ-Roy Morgan survey of consumer confidence rebounding in August to its highest level since January, despite rising offshore risks," she said.

"That said, the obvious risk in the near-term is that financial market dysfunction and increasing uncertainty over the strength of the global economy will encourage households to be even more focused on balance sheet repair, thus reducing spending. The threat of rising interest rates also could be a factor restraining spending in coming months.

"That said, the RBNZ Governor probably will refrain from reversing the “insurance” rate cut delivered in March until December, having made clear in July that the timing of the next rate hike was contingent on “current global financial risks” receding. With these risks since having intensified, Dr. Bollard will await clearance from offshore that conditions are stable enough to proceed with the commencement of a hiking cycle on the basis of domestic fundamentals," Kevans said.

See Stats NZ's comments below:

Seasonally adjusted total retail sales values rose 1.7 percent in the June 2011 quarter, Statistics New Zealand said today. Sales values rose in all regions, and most industries. This increase was the result of a 0.9 percent increase in total sales volumes, combined with price rises across a number of industries.

"The information we have suggests that actual sales in Christchurch have strengthened following the quake-affected March quarter," industry and labour statistics manager Kathy Connolly said. "The Retail Trade Survey is not designed to give a definite picture of sales movements below national level. However, the data that we do have makes it clear that the 'hardware, building, and garden supplies' and 'fuel' industries had significantly larger increases in Christchurch than in the rest of New Zealand." Compared with the rest of the country, department store sales were weaker in Christchurch, where approximately one-third of all department stores remain closed.

Nationally, 12 of the 15 industries recorded increased sales values in the June 2011 quarter. Motor vehicle and parts retailing, up 4.9 percent, contributed the most to the quarter’s increase, followed by supermarket and grocery stores, up 1.6 percent.

The motor vehicle and parts industry was also the largest contributor to the increase in sales volumes, with a rise of 4.2 percent. This was followed by a 10 percent increase in the volume of electrical and electronic goods.

The seasonally adjusted value of core retail sales (which excludes the two vehicle-related industries) rose 1.4 percent. Seasonally adjusted core sales volumes rose 1.0 percent.

The trend for total sales values has been rising since March 2009, and has strengthened slightly in recent quarters. The trend for total sales volumes has picked up since the December 2010 quarter, following a period of little growth.

The chart below is based on unadjusted data.

(Updates with chart)