New Zealand Dollar Dips as Shoppers Show Considerable Restraint

The New Zealand Dollar dipped on Friday, February 17 after data showed a slight slowdown in shop sales in the fourth quarter of 2016.

The data undershot expectations, coming out at 0.8% quarter-on-quarter (qoq), compared to the 1.0% forecast by analysts.

Core Retail Sales, which leaves out more volatile components such as food and fuel, rose by 0.6% from 0.2% in the previous quarter – there were no published estimates of core.

The data inferred restraint on the part of many New Zealanders who have grown wealthier on the back of a housing boom.

Also, most of the gains came from a narrow variety of items, the main one of which was automobiles, which saw sales increase by 1.9% qoq.

Overall the data showed little change from the previous quarter, according to ANZ Bank’s senior economist Philip Borkin, who commented that, "it is still a reasonable result, and a similar pace of spending growth as was seen in Q3."

Nevertheless he added the proviso that it was still on the soft side, saying “That said, in per capita terms, the 0.2% q/q lift is the softest growth in 18 months.”

The negative effect seen from the data on the Kiwi was short-lived in many cases as although it reduced the likelihood of interest rate increases from the central bank – a major appreciator of the currency – it showed falling demand for imports and therefore a narrowing of the Current Account deficit, which is positive for the currency.

The limited growth in Retail Sales is indicative of a fall in demand for foreign imports which will help reduce the trade deficit which will be a strengthening factor for the Kiwi.

“Retail spending is not weak. But households are showing more restraint than they typically would in the face of strong house price gains.

This is a key reason why the current account deficit has remained contained and domestic inflation pressures relatively tame. We believe this restraint will by-and-large continue, and we actually view it as a positive thing for the longevity of the economic cycle (less boom-bust),” said ANZ’s Borkin.

GBP/NZD Stalls After UK Retail Sales Also Soften

The GBP/NZD pair temporarily punched higher following the release of the weaker-than-expected New Zealand data but the Pound then gave up those gains as UK Retail Sales disappointed on Friday morning.

The pair withdrew from a peak of 1.7380 to trade in the 1.72s again following the release.

UK shoppers eschewed the traditional January sales it appears and tightened their belts in January after data showed a deeper-than-expected slowdown.

Headline inflation fell by -0.3% in January from December when a 0.9% increase had been forecast. Nevertheless, this was better than the -2.1% decline in December.

Core Retail Sales declined by -0.2%, which although not as steep as the -2.2% of the previous month was still well below the 0.7% which experts had forecast.

Year on year both Headline and Core slowed down to 1.5% and 2.6% respectively from previously healthy 4.1% and 4.7% rises in 2016; and were below downgraded estimates of 3.4% and 3.9%.

The fall in Sales raised concerns amongst economists, with Capital Economics’ Ruth Alexander suggesting the figures showed inflation was beginning to undermine demand, that weak consumption might undermine GDP and that it marked an end to UK economic data’s recent purple patch.

“January’s surprise fall in the official measure of retail sales volumes has brought the recent run of resilient economic news to an abrupt end and suggests that the hit to consumer spending growth from higher inflation is starting to materialise,” she said.

There was now a palpable threat of a decline in the Retail Sales contribution to GDP.

“Very strong monthly rises, in excess of 2%, over the next two months would be required to prevent retail sales from dropping in Q1 and dragging on GDP growth. That said, this would not be entirely out of the question, given that the retail figures are erratic, prone to large revisions and the surveys have been more upbeat,” added Alexander.

Petrol and food sales had especially been hit by the rise in inflation, with Retail fuel price inflation rising from 9.7% in December to a whopping 16.1% in January.

The Retail Sales deflator, which is a measure of the impact of inflation on prices has been rising steadily, “from a trough of -2.8% in March last year to +1.9% in January – the strongest since July 2013,” said the Capital Economics’ analyst.

This will likely impact on spending patterns leading to consumer’s reigning in their spending even more in the future.

Overall, however, Capital Economics’ see Retail Sales only slowing not “grinding to a halt” as spending on certain things, such as recreational activities, pubs and restaurants continued to show strong growth.

As such expect Alexander forecasts real growth of Consumer Spending of 1.8% in 2017 from 2.8% in the previous year.