Cars put brakes on retail sales

Consumer spending has slowed from a gallop to a trot.

Retail sales in the December quarter fell 0.4 per cent in dollar terms and were 0.7 per cent weaker when the effects of price rises, and more rarely falls, were excluded, Statistics New Zealand reported yesterday. It was the first decline in real sales for five years.

Motor vehicle sales, which make up about an eighth of retail spending, fell steeply. Core retail sales, which exclude the volatile automotive sector, were up 1.4 per cent in dollar terms and 1.1 per cent in real terms.

Westpac chief economist Brendan O'Donovan said real growth in core retail spending had averaged 1 per cent a quarter in the second half of last year.

"That is not down and out. But it is significantly slower than ... the preceding 18 months."

Evidence of the weakening in domestic demand that the Reserve Bank was looking for was becoming clear, O'Donovan said.

"With lower consumer confidence, lower employment growth and higher interest rates yet to bite fully on household spending, further weakness in retail sales appears all but assured."

Motor vehicle sales were down $200 million, or 8 per cent in real terms.

UBS chief economist Robin Clements said the sharp drop in car sales indicated consumers were cutting back on big-ticket items.

But the largest volume increase in sales was in another big-ticket category, domestic appliances, up $60 million or 6.2 per cent.

In both cases prices fell - 4.3 per cent for vehicles and 1.9 per cent for appliances.

Goldman Sachs JB Were economist Shamubeel Eaqub said the high dollar had depressed import prices. Competition ensured this was passed on to consumers, helping to boost household spending.

"However, as the New Zealand dollar depreciates from current over-valued levels, import prices will rise."

Bank of New Zealand economist Craig Ebert said the 8 per cent fall in car sales had to be seen in the context of 3.3 per cent jump in the September quarter. "It seems more of a hangover of the promotions that occurred during the September quarter when inventories needed reducing," he said.

"If there was a genuine weakening in vehicle expenditure then we should expect to see car registrations going backwards. They're not."

While consumer confidence had fallen, it had simply corrected after previous excesses, Ebert said.

ANZ National Bank chief economist John McDermott described the medium-term outlook as "sombre".

Consumer spending would slow under the influence of weaker house price rises, higher debt servicing costs, lower net immigration and falling consumer confidence.