Retail spending was much weaker than expected in the June quarter, signaling downside risk to our second quarter GDP growth forecast and RBNZ projections.
Q2 retail sales (volumes): -2.3% (Previous: -0.9%)
Westpac f/c: +0.3%, Market +1.7%
Q2 Core Retail Sales (Volumes): -1.6% (Previous: -0.3%)
Detail
Retail spending was much weaker than expected in the June quarter.
The volume of goods sold decreased by 2.3%. That was below our forecast for a moderate 0.3% gain, and well below analysts’ average forecast for a 1.7% gain.
Today’s drop follows a 0.9% decline in spending in the March quarter, leaving spending volumes down 3% in the first half of the year. Spending in core categories (excluding vehicles and fuel) is down 2%.
Looking below the surface, households have cut spending on durable items like electronics (down 6% over the past three months) and home furnishings (down 8%). We also note a drop in vehicle sales (-6%). These are the same categories where spending rose sharply when Covid-19 first arrived on our shores and public health protection measures led to an abandonment of spending on services.
Now that health restrictions have been lifted and with the opening of borders allowing tourists to return to the country, we have seen an increase in hospitality expenditure (+3%) and accommodation services (+10%) . However, these increases have not compensated for reduced spending in other areas.
Nominal spending levels have actually remained stable since the beginning of this year. However, household purchasing power has been squeezed by large and widespread increases in consumer prices. On top of that, mortgage rates rose in the first half of this year and consumer confidence plummeted.
Consequences
We have been anticipating a slowdown in household spending for some time, with rising mortgage interest costs signaling a significant squeeze on household budgets. However, this slowdown in spending came sooner than expected.
Importantly, many households have been insulated from the impact of interest rate hikes to date due to the high level of mortgage fixation in the New Zealand market. Over the next few months, debt servicing costs will rise sharply for many households as they reprice to higher interest rates. And on top of today’s weak result, this points to weak spending over the latter part of the year.
The weaker-than-expected retail spending result signals downside risk to our June quarter GDP growth forecast of 1.0%. More importantly, it also signals significant downside risk to the RBNZ’s 1.8% growth forecast. In its recent policy statement, the RBNZ highlighted the strength of inflation and the need for further OCR increases. However, in our view, the RBNZ has given little credit to the signs of slowing demand that have emerged.
Today’s result further reinforces our expectation that the OCR will peak at 4% by the end of this year, contrary to RBNZ projections which highlighted the risk of a higher peak.
We will firm up our GDP forecast as more partial indicators come out over the next two weeks.
