Retail spending rose by 1.7 percent in the December quarter (excluding the effect of price changes), and was up 5.4 percent over 2017 as a whole. Even accounting for the very large 2 percent increase in the population over the past year, that’s a solid increase. Gains have been seen in stores across the country, with online spending also pushing higher.
Underpinning the rise in overall spending over 2017 was a strong 5.6 percent lift in core spending categories (which excludes spending on fuel and motor vehicles). That included a 6 percent increase in spending on hospitality, and a 7 percent rise in spending on durable items like furnishings. Some of the strength seen late in the year may have been related to the increased prevalence of ‘Black Friday’ sales in New Zealand.
As we’ve moved into 2018, there has been a bit of volatility in overall retail spending associated with swings in fuel prices. However, spending on most items has generally remained firm.
We expect that spending levels will continue to grind higher over the next few months, supported by recent falls in mortgage rates and an associated second wind in the housing market. Increases to Working for Family payments in April will also provide a boost, as will the continued strength in tourist numbers.
However, spending growth looks set to slow through the back half of 2018 and in 2019. Spending by New Zealand households is closely related to the strength of the housing market. And despite its recent firming, the housing market is looking a lot softer than it did last year, with sales well down from their earlier peaks and price growth having flattened off.
Looking to the next few years, the new Government is planning on rolling out a suite of regulatory changes that will weigh on housing market conditions, such as the planned extension of the ‘bright line’ test for taxing capital gains on investment properties. This will also have a marked dampening impact on households’ spending over the coming years.
A further factor that will dampen spending growth over the longer term is a slowdown in population growth. Migration driven increases in the population delivered a powerful boost to demand in recent years. But while net migration remains elevated for now, it peaked back in July and has been gradually winding back. We expect this will continue for some time.
Despite strong spending growth over the past year, retail price inflation has remained very subdued, with overall retail prices rising by only 0.8 percent. Much of the softness has been centred on import-heavy categories, such as homewares and electronics, reflecting the earlier rise in the New Zealand dollar. But on its own this doesn’t fully account for the weakness in retail prices. Lingering softness in the prices of many globally traded goods has also played a role. In addition, we’re continuing to see strong competition in the retail sector, which has been amplified by the ongoing rise in online trading. Putting all this together, we expect the retail-pricing environment to remain subdued for some time yet.
Ranchhod, Westpac senior economist.