More spending, more jobs spark debt fears

By Brian Fallow

WELLINGTON - Improving labour market data and surprisingly strong retail sales figures have reinforced economists' expectations that the September quarter will prove a strong one.

The unemployment rate dropped from 7 per cent in the June quarter to 6.8 per cent, its lowest level for nearly two years.

Although the overall increase in employment - 4000 jobs or 0.2 per cent - was modest, the increase in full-time employment at 1.7 per cent was the strongest for three-and-a-half years.

Hours worked rose 0.7 per cent, the strongest increase since June last year.

Consistent with an improving export scenario, the main employment gains were in agriculture and forestry, manufacturing and transport. Despite strong retail sales in the quarter employment in that sector fell.

Bank of New Zealand economist Peter Jolly said that from the Reserve Bank's point of view modest employment gains on top of falling wages growth suggested the labour market was unlikely to be a significant source of inflation pressure in the near term.

But WestpacTrust's Donna Purdue pointed to firms reporting increased difficulty in finding skilled labour as an indication of stronger wage pressures to come.

Chris Green of Deutsche Bank said the markets were now unanimous in expecting the Reserve Bank to raise the official cash rate on November 17, with most expecting a rise of 50 basis points.

Meanwhile retail sales, adjusted for inflation, rose a strong 2.3 per cent in the September quarter, outstripping market expectations of 1.5 per cent.

The month of September was boosted by one-offs like Apec in Auckland and the world netball championships in Christchurch, as well as the timing of the school holidays.

But Mr Green said the fact that 14 of the 15 storetypes recorded increases for the month suggested a broad recovery in consumer demand.

"Reinforcing this assessment housing market activity remains robust, consumer and business confidence seem to be consolidating, while labour market conditions continue to improve," he said.

Accordingly, Deutsche Bank tips gross domestic product to rebound by 1.5 per cent in the September quarter, following the surprise 0.3 per cent contraction in June.

The Bank of New Zealand, impressed by the strong increase in hours worked, says the figure could be 1 per cent or higher, while WestpacTrust is forecasting 1.2 per cent.

Bancorp's Stuart Marshall sounded a warning note, however, about spending growing faster than incomes.

"Unless there was some previous stockpiling of wealth or all the retail growth was made by tourists, there must surely have been an increase in household debt." Credit card billings in September were 32 per cent higher than in September last year.

The strongest increase in retail sales in September was in the accommodation sector, followed by services stations (motor fuels make up two-thirds of their sales) and car sale yards.

Sales volumes in the quarter were up across the board compared with the same period last year, apart from shoe shops and hardware stores. The strongest increases were recorded by department stores (11 per cent ahead of last year) and cafes, restaurants and takeaways (12.9 per cent).

* Discount retailer the Warehouse lifted same store sales 15.7 per cent for the three months to October 31 on the same period last year. Total sales rose 20.7 per cent to $223.1 million.