Retail activity falls for second quarter in a row

Wednesday, 24 May 2023

Stats NZ’s latest data shows the total volume of retail sales fell by 4.1% in the March quarter – the second consecutive quarter of subdued activity.

The volume of retail sales also fell by 4% in the December quarter.

Stats NZ put the drop in retail activity down to decreased spending volumes on dining out and accommodation, alongside fewer sales of hardware and vehicle retailing goods.

Spending on accommodation was down by almost 20% in the March quarter - the biggest decrease in spending across all categories, followed by a 14% decrease in spending on food and beverage services, a 13% decrease on hardware, building and garden supplies and a 7.5% decrease on motor vehicles and parts.

Stats NZ business financial statistics manager Melissa McKenzie said the decreased volumes in hardware and vehicle retailing helped drive a fall in total retail sales in the March quarter.

Westpac economist Satish Ranchhod said spending levels were dropping as rising prices squeezed households' finances.

He said the pullback in spending was much weaker than other analysts expected.

The total volume of retail sales is inflation-adjusted and reflects how many goods households are receiving.

“We do expect that New Zealand households are going to find their finances increasingly squeezed and that is going to weigh on their spending over the rest of this year,” Ranchhod said.

“The big factors that are weighing on household spending right now are big increases in the cost of living, but also the rise in interest rates. The rise in interest rates is the larger impact; a lot of New Zealand households have been on fixed mortgage rates and previously a lot of them would have been on low rates, now they are rolling off rates that could have been about 2% to 3% on to something more like 6% – that is a pretty big squeeze on their spending power.”

Other Retail Trade Survey data by Stats NZ shows the total volume of seasonally adjusted retail sales was $26 billion in the March quarter, down 1.4%.

While volumes were down, the amount of money spent in the quarter was up 4.7% or $1.3 billion, to $30b, compared with the same quarter last year.

“The amount of cash we’re splashing out is still rising at a brisk pace; that says people are still in the mood to spend, but the fact is with those strong price increases we are splashing out more cash and getting less bang for our buck.”

For the Reserve Bank, that was a bad combination, said Ranchhod.

“Essentially, they need to slow down demand to get those price pressures under control.”

Ranchhod said the pandemic had brought about a big shift in spending on durables. While that had now come off, consumers were spending on areas such as travel and experiences.

A strong labour market, with high levels of employment, and consumers feeling secure in their jobs, was stoking an appetite to spend, he said.

“The concern for me is that we have still got this pressure coming through from higher interest rates; I think that is going to slow down demand and the labour market, and that could then see spending start to come off over the year ahead.”

Ranchhod said the fact that total volume of retail sales was going backwards rapidly showed the impact from rising interest rates was hitting households’ back pockets.

In an economic note, ASB said soaring living costs were likely to prevail over the year, and with the prospect of even higher mortgage interest rates, 2023 would be challenging for the retail sector.

“Retail sales volumes were much weaker in Q1 2023 than either ourselves or the market expected. It appears that households are in the process of tightening their belts amid already soaring living costs and the prospect of even higher mortgage interest rates.However, some weather-related restocking from the floods and Cyclone Gabrielle may have also impacted on activity over the quarter,” the bank said.

“The pivot back to pre-Covid-19 spending habits is continuing to hold up spending in some sectors.”

ASB said spending on services was benefitting at the expense of retail goods.

It said elevated net migration was likely to underpin consumer durables volumes as the year progressed.

BNZ said the “retail boom was officially over” in response to the latest data, and the wet weather was not to blame for the weak quarter.

It said the drop in retail activity could increase the chances of a recession.

“The poor retail volume result certainly weighs on our Q1 GDP calculations. It increases the chances of seeing a negative which, following the 0.6% decrease in Q4 GDP, would mark a technical recession.

“It’s early days in terms of the Q1 GDP partials. But we’re struggling to identify what component will do well enough to get Q1 GDP back into the black.”