Retail confidence improved in July - bolstered by a couple of months of strong sales post-lockdown - but economists warn the sector is set to lose its sparkle.
The latest Retail NZ Retail Radar report, which measures sentiment in the sector on a quarterly basis, found that 75 per cent of retailers were confident that they would survive the next 12 months, up from 39 per cent recorded in May.
It shows credit card spending was up 18.6 per cent in July, but overall spending from March to July was down 9.6 per cent on the same time last year.
Economists warn that once the wage subsidy extension finishes in September, so too will strong consumer confidence as job uncertainty weighs in and Kiwis opt to hold on to cash.
About 65 per cent of retailers reported an increase in sales in July, while 22 per cent reported a decrease, the report found.
It outlined that key drivers of increased spending in the past couple of months were likely New Zealanders returning home after a period of living overseas and people spending holiday money that would have otherwise been spent overseas.
Retailer confidence rebounded in June after lockdown restrictions were lifted, which continued into July. New Zealand's position to have avoided a second wave of community transmission until now and settled into a 'new normal' has meant that retailer and consumers are feeling more upbeat.
"It's really positive that we've had a couple of strong months of consumers getting out and spending but the total spending since March has not yet reached the point it was at last year," Greg Harford, chief executive of Retail NZ, told the Herald.
"I think the real challenge is ahead. Firstly with the general election coming up - that always leads to a bit of a retail slowdown and a bit of economic uncertainty. Secondly, the wage subsidy is ending for most businesses over the next few weeks and that will see a number of people likely lose their jobs."
This would mean more pressure on household incomes and consumers would be less willing to spend in the months ahead, and the possibility of a second wave of Covid-19 could leave consumers feeling cautious, Harford said.
About 13 per cent of retailers surveyed for the report said they expected to lay off staff over the next three months.
ASB senior economist Mark Smith describes recent spending in the sector as a "honeymoon period" supported by "nesting building" - people spending more on their homes.
"There has been quite a large rebound, particularly in the durables spending, as people focus on nest building. I think going forward there's still quite a lot of reluctance with consumers to part with their cash and I think that's really going to weigh on the retail sector over the next few months, particularly when we start to see the dole queue continue to increase," Smith told the Herald.
"At the moment it is very much a relief really that we've seen through the rebound, but there are clouds on the horizon and we're starting to see that now as consumer confidence starts to roll over."
About 450,000 people will roll off the temporary Jobseeker support in September, which will leave a hole in spending, and the unemployment rate will "undoubtedly increase" from today's level of 4 per cent, he said.
The housing market will also follow the labour market: ASB expects that to come off as well, Smith said. "For now we've got the retail sector running on euphoria - a bit of pent up demand, people not being able to go overseas and spend, so now they are nest building and spending more domestically."
Smith expects spending figures to drop significantly in the New Year after the traditionally busy Christmas period, but declines starting from August.
"I think the real catalyst will be employment numbers, and if they really decline significantly from September, there will be more of a retrenchment from retail.
"We're looking at monthly [spending] increases slowing from Q3 off this year and then slowing into Christmas. It could be a reasonably difficult Christmas for a lot of retailers."
Financial support from the government, the Reserve Bank cutting the official cash rate and essentially printing money had resulted in relief in equity prices and the euphoria flowed through to the financial markets, confidence and asset prices, but the challenge was whether there would be the "income backbone" to sustain this long term, Smith said:
"The unemployment outlook is reasonably grim over the next six months."
Kiwibank economist Mary Jo Vergara said the spike in spending in the retail and hospitality sectors after lockdown were expected, but these sectors would also likely feel the pinch the most as the wage subsidy comes to an end.
"The issue of job security will heighten from here on out - once people are a little bit more concerned about their future employment we will see that translate into spending."
Vergara said she expected the "sugar rush" to fade come September once the wage subsidy "band aid was ripped off".
"We'll see a hit to consumer confidence and that will translate into reduced spending - job security is still front of mind for many Kiwis and that will play on how they choose to spend. With mortgage rates and term deposit rates also low it will be harder to save, and they'll therefore have to save more, which will dampen consumer spending."
Kiwibank expects unemployment to peak around 9 per cent - higher than the rate recorded during the height of the Global Financial Crisis.
"We're expecting a pretty gloomy outlook for retail - consumer confidence might just plummet and spending will take a hit."
Harford said a second wave of Covid-19 in the community would be "deeply problematic" for the sector.
If this was to occur, it would make it harder for spending to recover: "It has been difficult for businesses to bounce back from the first lockdown and it would be significantly worse second time round".
