Consumers tighten belts as retail volumes decline

Report reveals consecutive quarters of falling retail volumes

Consumers tighten belts as retail volumes decline

Consumers are starting to tighten their belts as retail volumes have fallen for two consecutive quarters, according to a report from ASB Bank.

The report highlights the challenges faced by the retail sector in 2023, with soaring living costs expected to persist and the possibility of even higher mortgage interest rates.

Economist Kim Mundy (pictured), who authored the report, suggested that the retail sector will face a challenging year ahead.

"It appears consumers are starting to tighten their belts with retail volumes falling for two consecutive quarters," she said. "With soaring living costs likely to prevail over 2023 and the prospect of even higher mortgage interest rates, 2023 will be challenging for the retail sector."

The review also predicts a final 50-basis-point (bp) OCR hike in May, with potential OCR cuts depending on household spending weakness and net migration trends.

The Q1 2023 retail sales data reveals a significant weakness in retail volumes, surpassing market expectations. The decline in retail trade is attributed to households tightening their budgets amidst rising living costs and the anticipation of higher mortgage interest rates. However, weather-related restocking from recent floods and Cyclone Gabrielle may have also influenced the quarterly activity.

"Retail sales volumes were much weaker in Q1 2023 than either ourselves or the market expected. It appears that households are in the process of tightening their belts amid already soaring living costs and the prospect of even higher mortgage interest rates. However, some weather-related restocking from the floods and Cyclone Gabrielle may have also impacted on activity over the quarter," Mundy said.

While some sectors, such as services spending, continue to show resilience and reflect pre-COVID-19 spending patterns, the impact of elevated net migration on retail volumes remains uncertain.

The Reserve Bank of New Zealand's (RBNZ) view on the inflationary effects of migration will be crucial for policy decisions and consumption forecasts.

The report suggests the likelihood of a final 50bp OCR hike in May, with the cash rate potentially reaching a peak of 5.75%.

However, the RBNZ may indicate the possibility of further tightening measures. The contractionary policy settings and the prospect of higher interest rate payments pose strong headwinds to the retail sector's activity throughout 2023.

In Q1, retail spending volumes declined by 1.4%, significantly weaker than expected. Core retail volumes also experienced a 1.1% decline quarter-on-quarter (qoq). This follows a weak end to retail trade in 2022, with Q4 volumes revised lower to -1.0% qoq.

The year-on-year (yoy) figures indicate a downward trend, with total retail volumes falling by 4.1% and core volumes contracting by 4%. The report suggests that Q2 2021 marked the peak in retail volumes for the current cycle.

The weakness in retail activity was observed across multiple sectors, including discretionary sectors such as specialized food and liquor retailing, which experienced significant declines. Durable volumes were negatively impacted by soft housing market conditions and rising interest rates. However, apparel retail showed a quarterly lift, potentially influenced by restocking activity.

Rising consumer prices further constrained retail activity, with retail trade deflator prices increasing by 1.1% qoq and 9.1% yoy. Core prices also rose above overall Consumer Price Index (CPI) inflation, indicating a potential ongoing trend of high retail prices affecting retail volumes.

"Nevertheless, it’s clear that retail activity is being constrained by rising consumer prices," Mundy said.

The Q1 retail trade figures revealed an increase in retail stocks, which reached $9.8 billion, a 5.2% climb compared to the previous year. This rise in stock values, particularly in motor vehicle and parts retailing and department stores, suggests a shift from "just in time" to "just in case" inventory management post-COVID-19.

However, if consumers continue to curb spending due to the rising cost of living, retailers may face pressure to offload stocks, potentially leading to lower prices for retail goods.

"Nevertheless, how household spending evolves in the coming months can influence how much further the OCR rises and how long restrictive OCR settings are maintained," Mundy said.

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