Brian Fallow: Retail sales reveal healthy pulse and savings rates also positive

Retail sales in Auckland rose 11.1 per cent. Photo / Jason Dorday

As vital signs go, retail sales data for the last three months of 2014 were pretty healthy.

In real or volume terms, sales were up 1.7 per cent for the quarter, making an encouraging 5.9 per cent for the year.

In nominal or dollar terms sales rose 1.6 per cent in the quarter, making 4.7 per cent for the year.

The difference between the real and nominal figures testifies to the weakness of pricing power in the sector.

In the latest quarter, prices rose in only three of the 15 industries the statisticians divide the retail sector into. In nine of them, prices were lower than a year ago and in eight of them lower than two years ago.

Disinflation, in short, is not just about lower petrol prices.

Increased vehicle sales accounted for 30 per cent of the quarter's overall increase in retail sales. A weaker yen no doubt helped.

But in all, 10 of the 15 store types recorded higher sales compared with the September quarter when adjusted for normal seasonal effects.

At 4.7 per cent, the annual increase in retail spending is likely to be lower than the increase in households' collective wage and salary income, which rose 5 per cent in the year ended September reflecting growth in both employment and pay rates.

So nationwide, at least, we are not seeing a repeat of the mid-2000s boom when spending grew faster than incomes as homeowners spent a few cents in the dollar of the hefty annual increases in their housing equity - the wealth effect.

Ultimately that threatened to breach even the most liberal interpretation of the Reserve Bank's inflation mandate and saw it raise the official cash rate to 8.25 per cent.

That pushed mortgage rates into double digits and did nasty things via the carry trade and the exchange rate to the tradables sector, tipping the economy into recession even before the global financial crisis hit.

So let's not go there again.

There does seem to have been a shift in people's attitudes towards borrowing and saving since the recession. Household savings rates have been positive, though unimpressive, for the past five years after nine years of net dis-saving before that. But Aucklanders are challenging that benign picture. Retail sales in Auckland in the December quarter were 11.1 per cent higher than in the same period of 2013.

Some of that can be put down to demographics. Net immigration added more than 1 per cent to New Zealand's population in 2014 and Auckland received a disproportionate share - nearly half - of that gain. The city also benefits from internal migration from the rest of the country.

The latest annual increase in Auckland retail sales is conspicuously high by recent historical standards and the statisticians urge caution in interpreting regional-level data.

Even so, incipient signs of the wealth effect emerging in New Zealand's largest city, combined with the retail trade survey's overall picture of decent momentum in the domestic economy, will count against interest rate cuts in the deliberations of the Reserve Bank.