Nominal spending levels are continuing to rise. However, increases in prices mean we’re getting less for each dollar we spend.
- Q4 real retail sales (volumes): -0.6% (Prev: +0.6%)
- Westpac f/c: -1.7%, Market +0.2%
- Q4 nominal sales level: +1.7% (Prev: +3.4%)
Detail
Households are splashing out more cash, but we’re getting less bang for our buck.
Nominal spending levels rose by 1.7% over the December quarter.
However, with prices rising rapidly, the actual amount of goods we’ve been purchasing has been going backwards. In fact, the volume of goods sold fell 0.6% in the December quarter.
And this isn’t just a one-off drop. The actual amount of goods we’re purchasing has been edging downwards for a year now, even as rapid price rises have pushed nominal spending levels higher.
Looking into the details of the December quarter retail spending report, we are seeing a rotation in spending appetites. We’re now spending less on durable items like electronics and recreational goods, with spending in these categories down 9% on this time last year. However, our spending on recreational activities, like dining out and accommodation, has been climbing rapidly. That’s a reversal of the trends we saw following the start of the pandemic, and we expect that pattern to continue going forward.
We’re also seen a large increase in spending on necessities like groceries (up 6.6% over the past year). However, that’s at the same time as grocery prices have risen by more than 10%.
Implications
Today’s report highlighted two big trends for the RBNZ. First, while spending levels have continued to rise, that’s mainly due to price increases, rather than households actually purchasing more items.
Second, even in the face of price rises, spending appetites have remained resilient. In fact, discretionary spending on items other than groceries has continued to rise despite the increases in prices and interest rates.
The RBNZ last week signalled that further interest rates increases are needed to dampen domestic demand and the current rampant price inflation. However, we think the end of the tightening cycle is coming into sight and are picking the cash rate will peak in May.
As we’ve highlighted before, monetary policy does work. But it takes time for interest rate increases to affect activity, especially given the extent of mortgage rate fixing in the New Zealand economy. Over the coming year, more than half of all fixed rate mortgages will come up for repricing, and many borrowers will face interest rate rises of 3% or more. Combined with the squeeze on spending power from higher prices, that will be a large drag on households’ disposable income and spending.
In terms of the upcoming December quarter GDP result (due for release on 16 March), today’s retail volumes result was above our forecasts. However, we’ll firm up our pick for GDP growth as other partial indicators are released over the next couple of weeks.
