New data shows retail had a slow start to the year. Photo / Alex Burton
New data shows retail had a slow start to the year. Photo / Alex Burton
Sluggish retail sales in the first quarter of the year could be a sign of things to come as inflation and higher interest rates bite, economists say.
After price effects and seasonal patterns were removed, total sales volumes fell 0.5 per cent in the March 2022 quarter, following an 8.3per cent increase in the December 2021 quarter, latest data from StatsNZ shows.
The total volume of retail sales (with price effects removed) fell 0.5 per cent.
The Omicron outbreak truncated the post-Delta recovery, leaving activity 1.1 per cent below mid-2021 peaks, said ASB senior economist Mark Smith.
"Life looks to be returning to normal, but our view remains that retail spending is unlikely to show the same vigour in 2022 as it did during a stellar 2021."
The "trifecta" of soaring living costs, weaker household balance sheets and sluggish population growth would continue to weigh on household spending activity, he said.
"A soft outlook for household spending is expected to weigh on overall activity. Recession during 2022 cannot be ruled out."
Despite a subpar outlook for household spending, the RBNZ was expected to move forward with OCR hikes, including a 50bp this week, Smith said.
Six of the 15 industries measured by StatsNZ had lower sales volumes in the March 2022 quarter compared with the December 2021 quarter. Nine had higher sales volumes.
By industry level, the largest falls were in motor vehicle and parts retailing – down 4 per cent, and in hardware, building, and garden supplies – down 5.5 per cent.
Non-store and commission-based retailing – led the falls down 10 per cent.
Electrical and electronic goods retailing was up 2.7 per cent.
Westpac senior economist Satish Ranchhod said the result was lower than his forecast for a 2.2 per cent rise in spending over the quarter.
But he noted that it was off the back of a large rise in the December quarter and was still broadly steady.
"The softer than anticipated retail spending result signals downside risk to our forecasts for a 0.6 per cent rise in March quarter GDP," he said.
"We expect that domestic spending appetites will soften over the coming months. That's mainly due to two key developments. First is the rise in consumer prices, which is squeezing households' spending power," Ranchhod said.
"Second is the rise in mortgage rates. The related rise in debt servicing costs will add to the pressures on discretionary incomes.
"At the same time, the related cooling in the housing market and hit to households' balance sheets is likely to affect confidence and spending appetites."
While domestic spending was set to cool, we could expect to see some recovery in the hospitality sector following the opening of the international border, he said.
"Although international tourist numbers are still low compared to pre-Covid levels, we expect that they will rise quickly."
ANZ senior economist Miles Workman cautioned that the data was still "noisy" with the ebb and flow of Omicron waves heavily influencing behaviour.
"Nonetheless, headwinds to activity are intensifying, and the shine is expected to come off these (and other) data over coming quarters," he said.
"We're all hoping it's enough to get inflation on a path towards target in a relatively timely fashion, but as downside activity risks accumulate, upside inflation risks seem to linger."
