Spending outpaces forecasts

By BRIAN FALLOW economics editor

Consumers spent up large in February, increasing the chances that the Reserve Bank will step up the pace at which it raises interest rates.

Retail sales in February were 1.8 per cent higher than in January, seasonally adjusted, and 9.9 per cent up on February last year, Statistics New Zealand said.

The result is well above market forecasts of a 0.3 per cent rise, month on month; it is the fourth month in a row that sales have outstripped expectations.

Deutsche Bank economist Darren Gibbs said that although strong immigration flows and a rebound in tourism explained part of the increase, no less important were low interest rates and rising consumer confidence, including expectations of house price rises.

ASB Bank chief economist Anthony Byett said: "This level of consumption is likely to have pushed the GDP growth rate for the March quarter above 1 per cent and more than makes up for the December quarter's growth rate being below the Reserve Bank's forecast."

Gibbs said growth over the December and March quarters, taken together, was now likely to meet if not exceed the Reserve Bank's projections last month and put it on track to deliver at least the series of 25 basis point interest rate hikes it signalled then.

That would put interest rates up another 1.5 percentage points by the end of the year.

Economists still expect the Reserve Bank to raise rates in 25-point steps on April 17 and again on May 15, but said the strength of yesterday's retail numbers increased the chances one of those moves might be a 50-pointer.

Because household debt levels are already high, Gibbs said, it would not be surprising if retail spending growth began to slow markedly as the Reserve Bank raised rates, especially if prevailing expectations about house price rises proved optimistic.

"We also suspect that the implications of recent sharp declines in commodity prices, especially in the dairy sector, are yet to be factored into rural spending decisions."

As in previous months, car yards contributed disproportionately to the rise in retail sales, as buyers got in ahead of more stringent safety requirements effective from April 1.

Vehicle sales in February were 22 per cent ahead of February last year.

Even without the automotive sector, however, retail sales were 1.2 per cent up on January and 9.1 per cent up on February last year.

The strength was widespread, with 12 of the 15 store types Statistics New Zealand recognises posting increases.

Among the largest rises, compared with a year ago, were personal and household services, household appliances, footwear and clothing.

Strength in sales of big-ticket items like appliances, furniture and floor coverings is consistent with surging building consents, up 25 per cent on February last year.