Household spending slows as costs rise

Consumer spending is slowing with dearer petrol, mortgage costs and local body rates more than offsetting the boost from more jobs, higher wages and increased tax credits for families.

Retail spending rose 0.9 per cent in dollar terms in the June quarter but shrank 0.5 per cent in real terms, Statistics New Zealand reported yesterday.

Excluding the automotive sector, where fewer vehicles and less petrol were sold, retail volumes were up 0.7 per cent in the June quarter, but that was the weakest quarterly increase since December 2004.

Apart from vehicles and transport fuels, the contraction was heaviest among other durable items such as furniture, hardware and appliances.

Supermarket and grocery sales, by contrast, rose 3.3 per cent in real terms. Other store types recorded little change.

ANZ National Bank chief economist Cameron Bagrie said the average household budget was being squeezed, despite wages growing at their fastest pace since the early 1990s and a record number of people in the workforce.

The squeeze came from higher prices for essentials such as food, petrol, electricity and gas, and from higher mortgage interest rates and local body rates.

The bank estimates that net weekly earnings have risen nearly 12 per cent in the past two years, or $73 on average, but essential items have risen 20 per cent or $77, shrinking the income available to spend on other things.

"People have to spend more on core staples so they are substituting away from discretionary spending like the bigger ticket items and restaurant meals," Bagrie said.

"For the past five years, we have been spending more than we have been earning. For the next couple of years, we will still get reasonably good earnings growth but the pendulum will swing back the other way and we will see pretty sedate retail spending as households consolidate."

Statistics NZ said the trend in retail spending had slowed since the middle of last year, growing around 0.8 per cent a quarter, only half the rate over the previous seven years.

Bagrie forecast real growth in consumer spending to be less than 1 per cent in the coming year, slower than during the Asian crisis. But how marked the slowdown would be depended on the labour market.

"The unemployment rate is low, wage gains are solid and this combination is naturally giving households a lot of confidence about their future in terms of debt accumulation."

The labour market was slow to respond to rises and falls in the economic cycle, but with the economy set to slow further over the next year to 18 months, employment growth would eventually decline.

Deutsche Bank chief economist Darren Gibbs said that after the stronger-than-expected employment growth reported last week, the Reserve Bank would be relieved that the broader-trend decline in the growth of consumer spending remained intact.

"With the disposable incomes of some mortgage holders being increasingly undermined as mortgages are refinanced at higher rates, growth in retail spending looks likely to remain subdued in the second half of this year. Any signs of a reacceleration in growth would be of significant concern to the bank."

Retail Sales

* Were up 0.9 per cent in dollar terms in the June quarter.

* But down 0.5 per cent when adjusted for inflation.

* Supermarkets and petrol stations saw most of the increased spending.

* Big ticket and other discretionary spending suffered.