HomeOPINIONRetail spending to slow this year

Retail spending to slow this year

2016 was a record year for retail spending in New Zealand, but as we enter 2017, some of the key drivers of activity in the economy have started to shift. Most importantly, interest rates have risen and this is passing through to softer activity in the housing market. As a result, sales growth is likely to be a bit more modest over 2017 than it was in 2016.

Over 2016 we saw solid growth in retail spending, with nationwide sales rising by almost 6 percent over the year. This resulted in annual spending on electronic cards rising to a record level of $60 billion. However, while spending over 2016 as a whole was strong, sales actually started to lose some momentum through the final few months of the year relative to normal seasonal trends. This included a notable easing in spending on durable items, such as home furnishings. So what’s going on?

The latter part of 2016 saw two big changes in the economic landscape. First, the Reserve Bank tightened lending restrictions on investment properties, a measure aimed at limiting the risks around the financial system. Second, global interest rates started to rise following the election of Donald Trump and the related increases in expectations for US infrastructure spending. This has flowed through to higher mortgage rates here in New Zealand.

Combined, higher borrowing rates and tighter lending standards have seen some of the heat coming out of the housing market. House sales are down 9 percent since July. And over the coming year, we expect house price inflation will soften to a rate of 5 percent per annum – down sharply from the 15 percent growth that we saw over 2016.

Higher borrowing costs and the slowdown in the housing market have important implications for household spending. New Zealanders hold a large proportion of their wealth in housing assets. When house prices rise, we tend to feel wealthier and spend more. But when the housing market slows, it can have a dampening impact on spending. This is especially important for items such as household furnishings, spending on which is very sensitive to household wealth levels and which tends to increases when people purchase new homes.

But while higher borrowing costs and softening housing market conditions indicate some downside risk, a range of other factors are continuing to support spending. These including strong population growth, a bumper tourist season, and improved fortunes in the dairying sector. Balancing all these factors up, we expect retail spending will continue to grow over the coming year, but at a more gradual pace than in 2016.

2017 may also see some changes in the mix of good and services that households are purchasing. In the latest Westpac McDermott Miller consumer confidence survey, households noted that they intended to increase spending on leisure activities, like going to the movies or going out for drinks. However, households remain more downbeat about their spending on big ticket household items, with the proportion of consumers who think now is a good time purchase a major item lingering at below average levels. 

This story originally appeared in NZ Retail magazine issue 748 February / March 2017

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