Petrol, interest costs fuel shopping

Columnist·NZ Herald·

14 May, 2015 05:00 PM4 mins to read

Increases in retail sales have been stronger in Auckland than elsewhere in New Zealand. Photo / Chris Gorman

Housing values may be boosting confidence.

Retail sales boomed in the first three months of the year, growing a record 2.7 per cent in volume terms, in what may be an early sign of the "wealth effect" with rising house prices boosting confidence.

Core retail activity, which excludes petrol stations and car yards, was even stronger, rising 2.9 per cent, after a 1.9 per cent increase in the December quarter and making 7.5 per cent for the year.

All 15 of the sub-categories the statisticians divide the retail sector into recorded higher sales in volume terms, led by electrical and electronic goods retailing and automotive fuel.

Those figures adjust actual sales for the effects of price changes. Ten of the 15 store types recorded falling prices in the March quarter, led by a 14.9 per cent drop in automotive fuels. Nine of the 15 have price levels lower than they were two years ago.

In dollar terms total retail sales at $19.6 billion were up 1.7 per cent for the quarter. They were up 5.1 per cent for the year.

"Low petrol prices earlier in the year meant prices were, on average, roughly 20c lower over the March quarter, effectively boosting household disposable incomes," said ASB chief economist Nick Tuffley.

"Add in a similar effect from falling interest rates, and shoppers' wallets have fattened still."

Co-hosting the Cricket World Cup provided a strong additional boost to spending.

Combined with generally buoyant tourism, that increased accommodation spending a seasonally adjusted 6.9 per cent in the quarter.

But the Cricket World Cup was a one-off and Tuffley expects some pullback in retail spending in the June quarter.

"Moreover, petrol prices have lifted, which will undo some of the lift in disposable incomes."

Electronic card transactions for April in the core retail sector recorded a 0.7 per cent decline.

The data show the Auckland-centric nature of the spending growth.

In dollar terms, retail sales in Auckland were up 9.7 per cent on the March quarter last year, compared with an increase of 5.9 per cent in the rest of the country.

It followed an 11.1 per cent annual rise in nominal sales in Auckland last year.

This is faster growth than can be explained by the combination of population growth and per capita income growth. It may be an early sign of the wealth effect, in which homeowners enjoying rapid rises in their housing equity spend a few cents in the dollar of that increased wealth, turbocharging consumption.

But Reserve Bank governor Graeme Wheeler was sanguine when he appeared before Parliament's finance and expenditure committee in March.

"If we look at the Auckland house market now, we're concerned on the [financial] stability side because median house prices are 50 per cent above where they were in 2007," he said.

"We're not seeing the same wealth effects spilling over into spending and creating the inflation pressures like we were in 2006 and 2007."

Westpac economist Felix Delbruck said there were mixed messages in yesterday's data - turbocharged growth but low retail price inflation.

"[It] is one more illustration of the conundrum the Reserve Bank is facing and supports our view that the prospect of official cash rate cuts this year remains very uncertain," he said.

But Deutsche Bank chief economist Darren Gibbs said the March retail data did not alter his view that the Reserve Bank would cut the OCR by 25 basis points in the June and July reviews.

The rationale for easing was not based on any concern about aggregate demand in the economy, he said, but rather that growth - as solid as it has been - has not been sufficient to tighten the labour market or place any significant upward pressure on labour cost inflation.

"As a result, we think the bank will be less confident that inflation will rise towards the midpoint of its target range within an acceptable time horizon."