Retail spending was much softer than expected in the June quarter, signalling downside risk to our forecast for Q2 GDP growth and the RBNZ’s projections.
Q2 retail sales (volumes): -2.3% (Prev: -0.9%)
Westpac f/c: +0.3%, Market +1.7%
Q2 core retail sales (volumes): -1.6% (Prev: -0.3%)
Detail
Retail spending was much weaker than expected in the June quarter.
The volume of goods sold fell by 2.3%. That was lower than our forecast for a muted 0.3% rise, and well below the average analyst forecast for a 1.7% gain.
Today’s fall follows a 0.9% drop in spending in the March quarter, leaving spending volumes down 3% through the first half of the year. Spending in core categories (excluding vehicles and fuel) is down 2%.
Looking under the surface, households have been winding back their spending on durable items like electronics (down 6% over the past three months) and furnishings (down 8%). There has also been a fall in vehicle sales (down 6%). Those are the same categories where spending rose strongly when Covid-19 first arrived on our shores and measures to protect public health prompted a shift away from spending on services.
Now that health restrictions have been rolled back, and with the opening of the borders allowing tourists back into the country, we have seen increased spending on hospitality (+3%) and accommodation services (+10%). However, those increases have not offset the reduced spending in other areas.
Nominal spending levels have actually held steady since the start of this year. However, households’ spending power has been squeezed by large and widespread increases in consumer prices. On top of that, mortgage rates rose through the first half of this year and consumer confidence has plummeted.
Implications
We’ve been forecasting a slowdown in household spending for some time, with increases in mortgage interest costs signalling a significant squeeze on households’ budgets. However, that slowdown in spending has come through sooner than expected.
Importantly, many households have been shielded from the impact of interest rate increases to date due to the high level of mortgage fixing in the New Zealand market. Over the coming months, debt servicing costs will rise sharply for many households as they refix at higher interest rates. And coming on top of today’s soft result, that points to weak spending through the back part of the year.
The softer than anticipated retail spending result signals downside risk to our forecasts for a 1.0% rise in June quarter GDP. More importantly, it also signals significant downside risk to the RBNZ’s forecast for 1.8% growth. In its recent policy statement, the RBNZ highlighted the strength in inflation and need for further OCR increases. However, in our view the RBNZ gave little credence to the signs of softening demand that have been emerging.
Today’s result further reinforces our expectation that the OCR will peak at 4% by the end of this year, in contrast to the RBNZ’s projections which highlighted the risk of a higher peak.
We’ll firm up our forecast for GDP as other partial indicators are released over the next couple of weeks.
