Consumers remain cautious of spending

Although Auckland retail sales showed a small increase in July, nationwide there was a decline. Photo / Martin Sykes

Retail sales declined in July, reinforcing warnings from the Reserve Bank and other forecasters that any recovery will be a sluggish and patchy affair.

Both total and core retail sales (which exclude the volatile automotive sector) fell by 0.5 per cent from June levels, when adjusted for seasonal effects, Statistics New Zealand reported yesterday.

Market economists had expected a rise.

Compared with a year earlier total sales were down 1.4 per cent, the ninth straight month in which sales had shrunk on an annual basis.

The Reserve Bank in forecasts released last week expects private consumption to be down 0.1 per cent in real terms in the year ended March 2010, following a 0.7 per cent decline in the previous year, as households rein in spending in the face of falling employment, subdued wage growth and high debt levels - a legacy of the previous boom mitigated "somewhat" by lower interest rates. Only eight of the 24 types of retailer the statisticians divide the sector into recorded an increase in sales on the month before.

ASB economist Jane Turner said the monthly retail sales data were volatile and could easily bounce back next month.

"The weakness seems to defy most indicators including consumer confidence, housing demand and electronic card transactions," she said. "Nonetheless this weaker report does highlight that the recovery in consumer demand is likely to be muted, with households remaining cautious while unemployment continues to rise. In addition the Reserve Bank has signalled further [official cash] rate cuts are unlikely, paving the way for interest rates to continue to rise and dampen demand for both housing and consumer spending."

Deutsche Bank chief economist Darren Gibbs cited improvements in surveyed consumer sentiment and housing market activity as pointers to a lift in consumer spending.

As in the housing market the recovery would be led by Auckland where retail sales were 1.8 per cent up on a year earlier, in contrast to Canterbury and Wellington whether they were down 3.4 and 5.4 per cent respectively, he said.

"We don't expect growth in consumer spending to attain the unsustainable rates seen in the middle of this decade, not least because labour income growth is destined to be weak over the next 12 months."