Economy loses momentum as consumers enter hibernation

Weak retail sales in December and a steep fall in housing turnover last month have added to the evidence the economy is losing momentum.

Core retail sales (which exclude the automotive sector) fell 1.8 per cent in December when adjusted for seasonal effects, Statistics New Zealand reported yesterday. Compared with December 2008 sales were up just 1.6 per cent.

Even when a 5.6 per cent increase in the automotive sector is included, retail sales were flat compared with November.

This followed data on electronic card transactions for January which suggested new year sales did not compensate for a soft Christmas.

Transactions in the core retail sector were down 0.1 per cent on December and down 0.5 per cent when the automotive sector is included.

"After a period of increased spending the consumer appears to be going back into hibernation," Goldman Sachs JB Were economist Philip Borkin said.

"Given a backdrop of weak income growth and still fragile job security, ongoing deleveraging and recent housing market weakness, it is hard to be overly optimistic about the outlook."

However, ASB chief economist Nick Tuffley pointed to a 1 per cent rise in retail sales volumes over the December quarter as a whole as evidence that consumer spending is picking up again. It represented a turnaround after six quarters in which real retail sales had fallen.

More than half of the increase was in appliance sales, but while the volume of appliances sold rose 3.2 per cent in the quarter, the value of appliance sales was unchanged.

Westpac chief economist Brendan O'Donovan said that if GST were to be increased from 12.5 to 15 per cent as foreshadowed by Prime Minister John Key on Tuesday, some consumers would bring forward purchases to beat the increase.

Based on what happened when GST was last increased he would expect a 10 per cent increase in demand for durable goods and a 1 per cent lift in consumption of non-durables, but the increases would be unwound the following quarter.

Meanwhile, the Real Estate Institute yesterday reported that dwelling sales last month were the lowest since electronic records began in 1992, while its house price index fell 1.6 per cent from December.

Reserve Bank figures for housing loan approvals show the three-month rolling average is down 13 per cent on a year earlier in number and down 6 per cent by value.

Credit growth to the household sector remains weak.

Deutsche Bank chief economist Darren Gibbs expects the recovery in housing turnover to resume as the broader economy recovers, the labour market stabilises and confidence consolidates, especially if net migrant inflows continue at recent rates.

Uncertainty about potential changes to the tax treatment of investment property is expected to weigh on the market until the May Budget.

Changes to rules on depreciation and capital gains and the ring fencing of tax losses are all under consideration.

Bank of New Zealand economist Craig Ebert said the reaction of investors to the tax changes had the potential to soften the housing market even further, which would leave first home buyers and existing owner-occupiers in the box seat - for a change.

ECONOMIC DATA
* Core retail sales for December down 1.8 per cent.
* Real Estate Institute's house price index for January down 1.6 per cent.