Retail activity has continued to gather momentum. In the December quarter retail sales volumes rose 1.7 percent, the fastest quarterly growth since mid-2012. And the cards numbers suggest the pace has accelerated further into 2015. Stripping out fuel and other vehicle related items, electronic card spending rose 2.2 percent over January and February alone.
It’s now very clear that the drop in petrol prices since late last year fattened consumers’ wallets and boosted their spending. But the broader economic backdrop has also been favourable, and is likely to stay that way into next year – the Canterbury rebuild has yet to reach its peak, migration continues to boom, and low inflation has kept interest rate hikes off the table. The Reserve Bank has even signalled that it could lower the OCR further if inflation trends remain weak. We think it’s unlikely to do so given the strength of the wider economy, but financial markets have latched on to the possibility, pushing wholesale interest rates and fixed mortgage rates down.
So we were not at all surprised to see the Westpac McDermott Miller Consumer Confidence Index ticking up in the three months to March, or retailers expressing greater optimism in the latest ANZ business survey.
What did come as a surprise is the regional breakdown of the survey responses, with a particularly big lift in confidence outside the main urban centres. Consumer confidence in rural regions fell sharply late last year, and through the dry summer we were braced for more signs of rural pain amid urban gain. But rural sentiment seems to have largely bounced back. Even in the dairying heartlands of the Waikato and Southland, where people still feel less confident in their regions’ economic prospects and their own finances than they were six months ago, many think that it’s a good time to spend. Likewise, the latest ANZ business survey showed a sharp rebound in confidence in the agricultural sector.
It seems that farmers and rural consumers were braced for the worst late last year, when some analysts were predicting that Fonterra would downgrade its season milk price forecast to well below $5/kg and the threat of drought was just starting to emerge. At least one of those threats has since diminished. Soil moisture levels have been improving, and Fonterra has moderated its estimates of the likely hit to the season’s dairy production.
Meanwhile, confidence among urban consumers has stayed healthy rather than exuberant. In some ways this is just as surprising – cheaper petrol, falling mortgage rates, and rising property prices have been a boon to urban consumers and home owners. But it may be that rising house prices are creating as much angst as joy. Judging from the building consent figures, the response of Auckland construction to the obvious need for more building remains disappointingly sluggish, which doesn’t create confidence that the housing shortage will ease any time soon. Another factor keeping urban confidence in check may be the high exchange rate. While the NZ dollar has fallen against the US dollar in recent months, it has moved sharply higher against the euro, yen and Australian dollar, which is not good news for urban manufacturers or non-commodity exporters.
Time will tell if rural confidence continues to hold up. One side effect of drought concerns was a steep lift in global dairy prices through February – New Zealand is a sufficiently big player in global dairy markets that local drought can crimp global supplies. Now that fears of a New Zealand production squeeze have diminished, global prices have also come back.
And dairy prices aside, there is no doubt that the economy is running at multiple speeds. One reason is that the migration boom has been very uneven. While Canterbury, Auckland, Hamilton, Tauranga and Queenstown all enjoyed population growth above 1.5 percent last year, and Wellington and some smaller centres also saw population growth pick up, in many other regions it’s stayed distinctly lacklustre. Unsurprisingly, Auckland and Canterbury also experienced some of the strongest growth in retail spending over the past year.
So the survey results need to be put in perspective. But for now we’ll endorse their main message – it could have been even worse.
This story was originally published in NZ Retail magazine issue 737, April/May 2015.