Retail boom expected to ease

After booming last year, retail sales should grow at a more moderate pace over the next two or three years, economists predict.

"We are talking about a slowdown in the pace of growth," BNZ head of market economics Stephen Toplis said yesterday.

"Retailers should do okay in this environment, provided they do not build stocks to match recent sales volume growth."

Although official data for December will not be available for a fortnight, BNZ estimates that sales in last year were up a "staggering" 7.3 per cent in volume terms, which, after allowing for price changes, is the fastest growth for 10 years.

But some of the factors underpinning that growth are expected to weaken and it forecasts growth to ease back to 3.4 per cent this year and 2.5 per cent next year.

In particular, economists expect the housing market to slow despite evidence of its getting a second wind at the end of last year, when building consents, house price inflation and sales turnover all picked up.

Consents in December, though up on November, were still 8.6 per cent down on December 2003.

"By the end of this year, we expect the level of building activity to be down around 18 per cent on where it is now," Toplis said.

He attributes much of the rebound in house sales and prices to the fixed-rate mortgage war of November and December, now over.

One of the underlying drivers of the housing boom was a surge in net immigration, but that peaked in the middle of 2003.

Barry Hellberg, of the Retailers Association, said the dwindling inflow of migrants also made it harder for retailers to recruit middle managers, who were in short supply.

But generally labour shortages are positive for retailers because they push up incomes.

Toplis said lower-income households would get a boost from the Government's family-related Budget measures.

Higher interest rates could restrain spending on big ticket items.

"Nevertheless we expect the impact of this to be minimal."

Another source of buoyancy for the retail sector has been the "wealth effect", where people spend some of the increase in the value of assets such as houses.

Westpac chief economist Brendan O'Donovan said consumer spending responded to changes in house prices after one or two quarters but the peak impact did not appear until after five or six quarters.

If the peak in house price inflation occurred in the March quarter last year, the peak impact on consumer spending would not be felt until the first half of this year.

"Nevertheless by the end of 2005, we expect the pace of consumer spending to have slowed to around 2 per cent," O'Donovan said.