Core retail sales fell 0.5% in September, worst since March (updated)

Data shows weak consumer spending continued to take its toll on retailers in September, reinforcing pressure on the Reserve Bank to cut the Official Cash Rate sharply on December 4. Most are now expecting a 75 bps cut to 5.75%. (Updated to include comments from JP Morgan Chief Economist Stephen Walters). Sales in 'non-essential' areas such as takeaways, clothing, footwear, furniture and department stores were hardest hit, while supermarkets and fresh produce retailing held up reasonably well. Statistics New Zealand said seasonally adjusted core retail sales, which exclude car sales and repairs and petrol sales, fell 0.5% in September from August, the biggest one month fall since a 0.5% fall in March. Total retail sales, including car and petrol sales, rose 0.1% to NZ$5.509 billion in September. Total retail sales volumes for the September quarter, which is used to prepare GDP forecasts, fell 3.6% for the September quarter from a year ago, while core retail volumes fell 0.6% from a year ago. This suggests the recession, which has already lasted two quarters, is likely to be extended to the September quarter and beyond. Commenting on the retail sales figures, JP Morgan Chief Economist Stephen Walters said the figures are further evidence that New Zealand's economy is in the midst of what is likely to be a prolonged recession, and that retail sales look likely to deteriorate significantly further in the closing months of 2008. "The softness in retail spending is further evidence that New Zealand's economy is in the midst of what is likely to be a prolonged recession. The economy already has contracted for two straight quarters - we expect another three quarters of falling GDP, and the implementation of additional fiscal and monetary support in coming months. Our concern is that retail sales were this weak well before the onset of the worst of the latest bout of global financial market instability and asset price corrections. Retail sales almost certainly will deteriorate significantly in the final months of 2008. Falling house prices and job losses as firms act to cut costs make the outlook for household spending in the first half of 2009 particularly bleak," Walters said. "The RBNZ already has cut official interest rates aggressively, and we expect substantial monetary easing in coming quarters too. We forecast a 100bp rate cut in early December and a terminal cash rate of 3.25% later in 2009, exactly half the prevailing rate of 6.5%. Elevated market interest rates, however, and falling asset prices remain significant drags on household spending. The personal income tax cuts promised by the newly-elected National Government may provide something of a floor for household spending, but these will be undermined to a large extent by low confidence, mainly because of increased anxiety about job security."