Spending growth stays solid

  • Opinion
  • May 12, 2016
  • Satish Ranchhod
Spending growth stays solid

Strong population growth, increases in households’ purchasing power, and an influx of international tourists will all support spending.

However, spending is likely to be uneven across the economy, with major metropolitan centres growing at a faster pace than rural regions. In addition, the global economy has gotten a lot frostier and is weighing on conditions here in New Zealand.

There was a solid growth in retail sales in 2015. Adjusting for price changes, spending volumes were up 5.3 percent over the year and that strength has continued into early 2016.

We expect that spending growth will remain firm over the remainder of this year. There are three key reasons for this.

First, we’re seeing strong growth in households’ real spending power. Employment in the economy is continuing to expand, albeit at a gradual pace. On top of this, low petrol prices and softness in consumer prices more generally means that households’ earnings have been stretching further. In fact, adjusting for changes in the cost of living, wage growth is around a 15-year high! On top of this, borrowing rates are at some of their lowest levels in decades. These conditions have been putting a considerable amount of cash back into consumers’ wallets.

Reinforcing the increases in households’ spending power has been strong growth in the economy’s demand base, with the population currently growing at its fastest pace since the 1970s. In large part, this is due to record levels of net migration. Over the past year, there was a net inflow of 65,000 people - around 50 percent higher than the peak seen in the early 2000s. This has been a result of fewer New Zealanders leaving and more returning from overseas. Migration levels have also been boosted by a pick up in the number of new arrivals, including growing numbers of international students.

The third factor boosting retail spending has been the influx of international tourists, which we expect to continue in the near term. Visitor numbers rose nearly 10 percent to a record three million last year. In addition, those in the industry report very strong bookings for the coming year and that the industry has grown to the point where capacity constraints are becoming a genuine issue.

Combined, the above factors signal a supportive environment for overall retail sales in the economy. However, it’s likely that we’ll see the strength of spending vary considerably across regions.

Strength in demand is expected to be centred on major urban areas, which are experiencing stronger population growth and where employment prospects are more favourable. There’s a particularly positive outlook for Auckland, where a strong outlook for residential construction is likely to boost to spending in areas such as household furnishings.

In contrast, demand conditions are likely to be weaker in many rural centres. Businesses in rural regions are already reporting softer spending as weakness in commodity prices (particularly for dairy) dampens incomes. Such pressure is likely to become more pronounced over the coming year, with global conditions pointing to continued downward pressure on commodity prices. Population growth is also likely to be more limited in rural regions.

One area of uncertainty for retail conditions in New Zealand is what’s happening offshore. The outlook for global trade has deteriorated in recent months, signalling strong headwinds for economies such as China and emerging markets, which are key markets for New Zealand exporters and importers. While this signals that softness in prices of many goods will continue for some time, it also points to a number of challenges. In particular, weakness in global trade and economic conditions adds to the risk that we’ll see confidence among New Zealand households and businesses falling, with associated downside risk for employment and spending. Furthermore, a rocky global environment may mean that New Zealand is facing a tougher time in terms of financial conditions, with higher costs for borrowing and tighter access to credit. 

This story originally appeared in NZRetail magazine issue 743 April / May 2016

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