Weak Retail Spending but Migration Improving

Tuesday 26 August, 2008

We have learnt very little that is new about the New Zealand economy over the past week. On Friday we got confirmation of weakness in retail spending although the 0.7% decline in the seasonally adjusted volume of spending excluding the automotive sectors was slightly better than expected. But anyone who has had a habit of looking at the quarterly Household Labour Force Survey will realise that even on a quarterly basis economic data in New Zealand need to be treated extremely carefully. Any single piece of monthly data should always be distrusted. The labour market survey revealed a 1.7% seasonally adjusted decline in the number of hours worked during the March quarter which led to extreme worries about major weakness in New Zealand’s labour market this cycle. Those worries have now pulled back substantially with the June report showing a 2.3% rise in hours worked. It's best to smooth even these quarterly numbers and doing so we get zero jobs growth over the first half of this year and just a small gain in the total number of hours worked.

But if we undertake the smoothing exercise for the retailing sector we find 0.4% shrinkage in spending over the first half of this year. Consumers have got their wallets closed and even though we have seen evidence of some improvement in sentiment recently worries about the economy remain high and retailers should anticipate continued tough conditions into at least early next year. Note however that one thing different this recession from the last one is that net annual migration inflows remain positive near 5,000. During the last recession the net gain was negative and sat at around 11,000 per annum from late 1998 into the middle of 2001.

Things will get interesting in mid-2009 however when interest rates will be lower and there will have been two rounds of tax cuts assuming a change in government at this year's general election. These positives will be acting against negatives of the additional weakness we expect to come in the labour market with a rise in the unemployment rate on its way towards just over 5%, and the continuing risks associated with world growth and especially the international credit crisis and its impact on bank funding costs.

Source: Tony Alexander, Chief Economist of the Bank of New Zealand.