Core retail sales fell in the first three months of the year but economists say the underlying picture is brighter than the numbers suggest.

Sales fell 2 per cent in nominal dollar terms and 2.5 per cent in real terms, when taking account of inflation.

Core sales exclude car yards and petrol stations. Total sales, which include them, were down 0.8 per cent in dollar terms and 1.5 per cent in real terms in the quarter.

Falls were expected as retail sales had been boosted in the second half of 2011 by Rugby World Cup visitors.


Spending on accommodation fell back to the levels prevailing before the September and December quarters last year. But liquor sales held up.

The big drop in the March quarter, explaining almost all of the overall fall, was in supermarkets and grocery stores, which make up nearly a third of core sales and nearly quarter of total sales.

They dropped 7.4 per cent in real terms - the steepest decline since comparable data began in 1995 - and 6.2 per cent in dollar terms.

Although some of that would be related to the Rugby World Cup, it leaves sales in that sector at the lowest ebb in real terms since the recessionary quarter of March 2009.

It also means supermarket and grocery sales were 2.8 per cent down in real terms from the March 2011 quarter.

ASB economist Daniel Smith pointed to the fact that the price deflator Statistics NZ used to calculate the real change in supermarket and grocery sales is much higher than its own food price index would justify, either for the quarter or for the year.

"It is simply hard to fathom that New Zealanders are cooking or cleaning less than they were at any time over the last three years," he said.

"That strongly implies the headline retail result is underestimating the true underlying pace of retail demand."

Even with the March quarter's falls, total sales in real terms were up 3.4 per cent on the same period last year and up 3.3 per cent for the core sectors.

Infometrics economist Matt Nolan said that, encouragingly, the volume of durable goods sales (vehicles, furniture, hardware and electronic goods) picked up further in the quarter.

But even with the latest quarter's 2.5 per cent rise, sales of durables are still 11 per cent below their peak five years ago.

"So once households become more secure about their financial situation there is considerable scope for a lift in durable goods spending," he said.

But Nolan does not expect to see any sizeable lift in retail spending during the remainder of this year, whether for durables or generally.

Income gains will be limited by weak employment growth and falling export commodity prices.

And with the European debt crisis continuing to bubble on, households would remain wary of borrowing, even with record low interest rates, he said.

Deutsche Bank chief economist Darren Gibbs said that after the pull-back in the March quarter growth in consumer spending had probably reverted to a steady upward trend, broadly in line with growth in labour earnings.

Nominal spending in the March quarter was 4.4 per cent higher than in the same period last year, in line with the 4.6 per cent growth in aggregate labour earnings reported by the Quarterly Employment Survey.

Last week's electronic card spending report pointed to a solid lift in spending during April, and retailers were notably more upbeat in the National Bank's April business sentiment survey, Gibbs said.

"In addition we note a solid rise in today's BNZ-Business NZ performance of services index, with the April reading of 56.7 equalling a level last seen in March 2010, and with the employment index rising to 55.1, a level only exceeded in June 2007."

These data suggested the economy had begun to gain some momentum despite pressures on manufacturing.