NZ Real Retail Sales Fall 1.5% in Q2

You pay more, you buy less!

• Retailers are facing the toughest conditions since the early 1990s.
• Sales volumes are being squeezed by a severe cost shock.
• Still on track for more OCR cuts, with the weaker NZD not an issue yet.

Comment

Retail spending remained very weak in the June quarter, though not quite as bad as the market expected. Sales volumes fell for the second straight quarter, the first time this has happened since the 1991 recession (though that was a significantly steeper decline).

The fall in retail sales reflects the immense pressures operating on household budgets. Sharp increases in fuel and food prices and high interest rates have all put the squeeze on. Petrol prices rose 13% in Q2, while food prices rose more than 2% to be up 7% over the past year. Moreover, falling house prices and finance sector closures and freezes have severely dented confidence, despite solid wage growth and a still-tight labour market.

The auto sector has been hit particularly hard, thanks to higher fuel prices and reduced access to financing. In the three months to June, motor vehicle sales volumes fell 10.4% compared with the same period a year ago. There was a 5.2% rise in vehicle sales in the month of June, but we would regard this as a technical bounce following a 14.6% drop in May - monthly car registration figures show that the trend remains well and truly downward. Fuel sales were up 24% on a year ago, all of which was accounted for by higher prices.

Supermarket sales volumes fell 3.7% in Q2, reversing a 3.3% gain in Q1. Without a compelling reason behind either move, we would have to regard this as a statistical quirk. Year on year, supermarket spending was up a moderate 5.3% and volumes were down just 0.5%.

There was no single storetype that accounted for the upside surprise in sales - in fact, the strongest single contributor was “other retailing”. Surprisingly, the second largest contributor was appliances, with volumes up 1.3% (s.a.) in the quarter, though the dollar value was down slightly. This supports recent anecdotes of heavy discounting, though there is little evidence of this happening in other sectors during the June quarter. And any bargains there are to be found may be short-lived - for example, Fisher & Paykel has already announced that it will increase its prices in September due to rising steel costs, and other manufacturers are no doubt in the same boat.

The gap between rural and urban spending is not as marked as it was earlier in the year, as drought conditions have reduced farmers' incomes. In broad terms, though, spending remained stronger in the South Island than in the North, with the Auckland region still under the gun.

Outlook

All up, 2008 has turned into an annus horribilis for retailers, especially for sellers of big-ticket items, as they are squeezed from both sides. The consumer is currently under a lot of pressure, and even with the monetary easing now under way and the stimulus of tax cuts from 1 October, we expect spending growth to remain subdued for some time yet. On the other side, a net 79% of firms reported higher costs in the June QSBO, and even with a record proportion of firms intending to pass on these costs to consumers, expectations of falling profitability are the most widespread in 25 years.

Indeed, we have to emphasise again that NZ is not going through a typical slowdown. Like the rest of the world, we are facing a major cost shock, the likes of which many people will not have experienced before. Rising prices for food, petrol, and all associated products have left consumers with a severe reduction in purchasing power - spending on fuel alone was $359m higher in Q2 than a year ago, leaving less to spend on other items.

To claim that slowing activity on its own will take care of inflation pressures is to completely misrepresent the cause of this slowdown. Sales volumes have fallen as sharply as they have precisely because prices are rising faster than incomes. It's a simple equation: you pay more, you buy less!

Market implications

The New Zealand dollar rose from 0.6970 to 0.7010 on the release, while there was no discernible reaction in interest rates.

Today's figures have no implications for monetary policy in the near term. The RBNZ began its easing cycle in July due to concerns that higher offshore funding costs would be passed on to households and businesses. Those concerns will still be valid in September - wholesale interest rates are already assuming an extended easing cycle, so a pause at this stage would risk becoming a de facto tightening.

The RBNZ's proviso that “there is no excessive exchange rate depreciation” seems to have been a red rag to a bull for markets, with the trade-weighted index so far averaging about 3% below the RBNZ's June projections. This is a sizeable miss, but not the worst they have ever faced, so we don't think it will prevent another rate cut in September. But if the currency were to continue to fall at its recent pace, a pause in October or December is a possibility.

Westpac Institutional Bank

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