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Weekly Commentary

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Beset on all sides

Mon, Jul 14 2008, 06:34 GMT
by Westpac Institutional Bank Team

Westpac Institutional Bank

Plunging business confidence and continued pressure on households has put the acid on the Reserve Bank to deliver some relief soon. But this week the focus turns to the RBNZ’s other problem – inflation is on the rise and heading well outside the target range.

Retail sales fell 1.2% in May, dominated by a 14.8% fall in motor vehicle sales. The car market is under more pressure than most from tight credit, high interest rates and rising petrol prices, with petrol breaching the psychologically important $2/litre mark in May. Excluding the autorelated sectors, retail sales were up 0.7%, driven by a 3.0% rise in supermarket sales. However, a 1% increase in food prices during the month suggests that volume growth remained weak – we suspect that real consumer spending in Q2 was even weaker than the -0.4% recorded in Q1.

REINZ data showed that house sales were down slightly in June, though we estimate that they were 10.7% higher in seasonally adjusted terms. Sales are still down 47% on a year ago, but this is an improvement on the -53% pace seen last month. The median sale price fell from $345,000 to $340,000, leaving it effectively flat over this year and down 2.2% on a year ago. Since April, fixed mortgage rates have fallen as much as 50bp for the most popular terms, so it wasn’t surprising to see some signs of stabilisation. However, days to sell rose above 50 for the first time in nearly eight years, suggesting the housing market adjustment has further to go.

The NZIER’s Quarterly Survey of Business Opinion clearly showed that businesses are feeling the pinch as well. General business confidence remained at a 33- year low in raw terms, though it was a touch higher when seasonally adjusted. However, firms’ own activity expectations slumped to the second-lowest level in the history of the survey (only 1982Q4 was worse). This measure fits with our view that GDP shrank again in the June quarter – enough to meet the rule of thumb for a recession – and suggests that Q3 won’t be flash either.

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Published on  Mon, Jul 14 2008, 06:38 GMT