A rebound in consumer spending lost its momentum in the initial months of 2010 as the housing market slowed, Treasury reported in its monthly economic indicators series.

Treasury said the data released through February provided a mixed view of the economic recovery, with differences emerging between sectors in New Zealand.

Treasury said weak housing activity may be a result of uncertainty surrounding changes to property tax, but there may be a 'technical' rebound in February sales given the extent of the January fall.

The full release is attached below:

Weak housing activity may have been compounded by uncertainty about future changes to property taxes. As a result, we could expect a technical rebound in February sales, given the extent of the January fall. In the near term, we anticipate the housing market will be relatively steady, as a gradually improving labour market and still high population growth are tempered by rising mortgage interest rates and tighter credit.

Economic activity continues to increase broadly in line with the Half-Year Update, although some differences are beginning to emerge across sectors.

Employment was less negative than expected and while the unemployment rate lifted sharply, we expect employment to begin to increase in coming quarters.
The outlook remains for a gradual economic recovery, with risks remaining around the conversion of expectations to activity, along with continued global uncertainty.

The New Zealand economy is continuing to recover, though some momentum, particularly in the household sector, may have been lost over the initial months of 2010. Forward-looking indicators are generally positive, especially for the manufacturing and construction sectors and the lower exchange rate in recent months is providing more confidence for exporters.

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Retail sales rose further in the December quarter, reflecting the significant lift in consumer confidence over the second half of 2009 as the economy emerged from recession. Discounting played a key role in increasing volumes, as the higher exchange rate helped to lower the price of imported goods. However, sales in the December month were weak and initial indicators for January suggest momentum may continue to ease in the short term, with both consumer and retailer confidence slipping.

Following a strong bounce-back over the middle of 2009, housing activity has also lost momentum in recent months, with January data showing a sharp fall in sales. While some of the weakness may reflect some uncertainty about future changes to property taxes, it is more likely the initial euphoria resulting from historically low interest rates earlier in 2009 has somewhat faded. However, residential construction is expected to contribute strongly over coming quarters, as building consents continue to rise and activity expectations remain at historically high levels.

Employment was fractionally more positive than we had expected in the December quarter, while unemployment lifted above market expectations. With employment intentions continuing to rise, we expect employment to begin to expand again in coming quarters. Wage growth slowed in December, reflecting the lag between labour market conditions and wage setting. With more people seeking work and more firms in a position to increase work hours rather than employee numbers, wage growth is likely to remain subdued in the near term.

While uncertainty continues to dominate the global economic environment, Australia and Asia are recovering strongly, which along with a lower dollar and more positive outlook for manufacturing and construction, bodes well for exporters. While we are yet to see the full pass-through of higher expectations to activity, growth is likely to continue gradually recovering, in line with a strengthening labour market and other economic indicators.