Weaker sales cast new doubt on NZ recovery

By Brian Fallow

WELLINGTON - Weaker-than-expected retail sales in May have fuelled doubts about the strength of the economic recovery.

ANZ Bank chief economist Bernard Hodgetts said that coupled with recent easing in business and consumer confidence, the further sharp drop in sales in May raised questions about the momentum of the recovery.

But the evidence was not all one-way, he said. Business and household borrowing have accelerated over the past few months and turnover in the housing market continued to increase in May, albeit with flat prices.

Adjusted for seasonal effects, retail sales in May were down 2.1 per cent on April, which in turn was 0.9 per cent down on March.

April's decline was thought to relate to the timing of Easter, with pre-holiday stocking-up all occurring in March while the holidays themselves fell in April. But with May seasonally adjusted sales also declining, there was now evidence to suggest April's fall was indicating a slowdown in addition to any Easter effect, Statistics New Zealand said.

Economists counselled against reading too much into volatile monthly figures, however.

Bank of New Zealand economist Peter Jolly said that taking three-monthly moving averages and comparing them with the same periods a year earlier showed a continuing pick-up in growth. Retail sales for the three months to May were up over 4 per cent on a year ago, compared with 3 per cent at the beginning of the year.

"Excluding motor vehicles, the advance has been even stronger, with sales now up over 5 per cent, the highest annual increase for almost four years," Mr Jolly said.

While confidence had fallen in the past few months, it remained at relatively optimistic levels, consistent with the present GDP growth rate of 3 per cent, not the 5 or 6 per cent pace previous higher levels of confidence were suggesting, he said.

The WestpacTrust consumer confidence survey last week showed consumers taking a less rosy view of both the economic outlook and their own prospects, after three quarters of rebounding confidence.

WestpacTrust chief economist, Bevan Graham, said it reinforced the view that much of the strength of retail spending in recent quarters had been catch-up from last year, when consumer confidence had been hit by the Asian crisis.

He expected growth in retail spending to return to more subdued levels as the lacklustre export sector failed to propel a more robust economic expansion.

In Auckland, sales were up 4.4 per cent on May last year, but in Waikato the increase was only 1 per cent. Most types of store recorded higher sales than a year earlier, apart from shoe shops (down 5.4 per cent) chemists (down 1.5 per cent) and appliance stores (down 0.6 per cent).

The biggest gains were posted by cafes, restaurants and takeaways (10.3 per cent). Statistics NZ said the underlying trend in department store sales had been declining since early this year, after almost two and a half years of growth.