Spending appetites are being supported by low interest rates, a firming in the housing market and increases in households’ disposable incomes. However, slower population growth means that overall spending levels aren’t likely to rise as quickly as they did in recent years.
Following rapid gains of 5 to 6 percent per annum through 2016 and 2017, annual nominal retail spending growth slowed to a more moderate pace of 4 percent over the past year. That slowdown came against a backdrop of a cooling housing market and a fall in consumer confidence, which saw many households putting away their wallets.
Looking ahead, another year of moderate growth is on the cards for the retail sector, with nominal spending levels set to rise by around 4 to 4.5 percent over 2019.
Among the factors continuing to support spending is the low level of borrowing rates. The back half of 2018 saw the Reserve Bank signal that, under its new dual mandate, it’s willing to tolerate a bit more of a pickup in inflation (at least temporarily) in order to shore up economic growth. Consistent with that change, we now expect the RBNZ will keep the Official Cash Rate on hold through to November 2020 – a longer pause than we previously anticipated. The resulting falls in mortgage rates have seen the housing market firming again and have boosted spending appetites, particularly for furnishings and other durable household items.
A strengthening outlook for household incomes is also helping to support spending appetites. With the economy in good shape, employment has been rising. And looking to the next few years, we expect that unemployment will remain low, at rates close to 4 percent. At the same time, wage growth has started to pick up, and it’s set to rise even further over the next few years.
But while the above factors will help to bolster households’ spending appetites, growth in overall spending levels is being restrained by a changing outlook for net migration and population growth. In recent years, the combination of strong inflows from other countries and low departures of New Zealand citizens saw population growth soaring to rates of over 2 percent per annum. That provided a powerful boost to spending levels. It also played an important role in helping businesses source skilled labour.
However, while net migration is still elevated, new arrivals into the country have levelled off and many of those who arrived in recent years are now returning home. Those developments have seen net migration trending down since mid-2017, and we expect it will continue falling over the next few years. Just as the earlier run up in migration provided a boost to demand in previous years, the slowdown now in train will be a drag, moderating an ‘easy’ source of demand growth that many businesses have been enjoying.
Putting the above factors together leaves us with a picture of continuing, but moderate spending growth over the coming year. But at the same time, many retailers will find themselves wrestling with rising costs, particularly with regards to wages. Base wage rates in the retail sector rose by 2.2 percent over the past year - the fastest pace of increase we’ve seen since the financial crisis. We expect that wage rates in the retail sector will continue to push higher over the coming year, in part due to the planned $1.20/hour increase in the minimum wage scheduled for April.
On top of that, competitive pressures in the retail sector remain strong, with continued growth in online trading and other ecommerce developments driving changes in business models. That’s limiting the ability of retailers to push up prices and means that scope to expand margins is likely to remain limited for some time.