Strong retail spending belies forecasts

By IRENE CHAPPLE

Better-than-expected retail figures yesterday shattered expectations of an economic slow-down and left economists wondering how long the good times could last.

The National Bank said low unemployment and improving household wealth were likely to trigger wage gains.

"Over the year ahead it is likely consumer spending, and the domestic economy more generally, will be supported for some time yet."

Yesterday's statistics showed growth in total retail sales at a seasonally adjusted 0.8 per cent for the June quarter, above economists' expectations of 0.2 per cent.

Fifteen of the 24 retail industries recorded higher seasonally adjusted sales, with total spending of $13.16 billion, 7.7 per cent higher than for the same quarter the previous year.

Appliance retailing was the main contributor to the increase, reflecting the strong housing sector, while the leisure industries were also buoyant, reflecting a strong tourism market.

Economists reacted by upping their bets that the official cash rate would be raised when it is reviewed on October 28.

The figures come in the same week that unemployment was disclosed at 4 per cent, a 17-year low.

BNZ chief economist Tony Alexander said the rate of growth in the economy needed to be controlled because it was "too fast for the labour market and too fast for the infrastructure".

"There are a lot of sources of inflationary pressure."

Robin Clements, chief economist of UBS, said the problem was "a good one" and largely the product of the booming housing market.

"People have been feeling confident and spending."

While a slowdown is still regarded as a "when, not if", the screws are expected to be turned on interest rates to squeeze the retail market and slow growth.

A 25-basis-point increase in the official cash rate was already seen as almost certain for September's monetary policy statement.

Several economists now pick another increase when the Reserve Bank reviews the official cash rate in 10 weeks.

Citigroup New Zealand economist Annette Beacher relied on the unemployment and retail sales to revise her expectations for October to a peak of 6.5 per cent.

She said the Reserve Bank's emphasis on lagging indicators "suggests that cash rates will continue to rise until more clear evidence of a slowdown emerges".