Retail spending surge starts to run out of puff

By BRIAN FALLOW

Retail sales were brisk in the September quarter, but there were signs in yesterday's data that this year's spending spree may be starting to run out of puff.

Adjusted for inflation and seasonal effects, retail sales grew 1.1 per cent in the quarter, the same pace as in the June quarter. Durable goods such as appliances and furniture made the strongest gains, along with hotels and restaurants.

But the growth was concentrated in July and August; the month of September was flat.

On its own that might not be significant, said Bank of New Zealand chief economist Tony Alexander, given the volatility of the monthly numbers.

However, when combined with Waikato sales being down 1.4 per cent in September, the first such decline since March 2000, it suggested that the prospect of reduced dairy returns was starting to constrain spending, he said.

"Consumer confidence as measured by the monthly Colmar Brunton survey has eased to long-run average levels from the heights reached in the first half of the year and that suggests spending will pull back to average as well."

Nevertheless, Alexander expects retailers to enjoy a strong Christmas, supported by confidence in the labour market, below average interest rates, continued strong population growth and rising wealth from higher house prices.

Westpac economist Nick Tuffley said retail spending growth had eased from the very strong, and unsustainable, rates of late last year and early this year, and he expects it to continue to moderate.

"The combined stimuli of housing turnover and net inward migration will lose some of their potency, and weaker export incomes will impact on rural spending."

Deutsche Bank chief economist Ulf Schoefisch points to the fact that spending fell in the South Island and Waikato in August and September, but Auckland and Wellington have outperformed the national average.

"We expect this two-speed economic profile to continue over the next six months," Schoefisch said.

"Retail sales in the Auckland region will continue to benefit from strong net inward migration, while a buoyant housing market is likely to keep consumer confidence above the national average."

The 1.1 per cent real growth recorded in the September quarter was well above the 0.7 per cent average forecast of market economists.

However it has not dislodged the general view that the Reserve Bank will keep interest rates unchanged next week and well into next year.

The 1.1 per cent real growth implied on average no increase in prices because nominal sales also rose 1.1 per cent for the quarter.

But that is an average. Statistics New Zealand said 10 of the 15 store types it recognises recorded price rises, but the five which fell included the three largest: food (0.1 per cent), vehicles (0.9 per cent) and service stations (1 per cent).

The strengthening NZ dollar may have contained the pressure to raise prices. That dampening effect is likely to have further to run, as the dollar has risen 4 per cent, on a trade-weighted basis, since September.