Fine for now

Data continues to point to the NZ economy ticking along at a respectable pace through the middle part of this year. But recent forward looking indicators of activity are not looking nearly as encouraging, and leave us feeling a little more confident in our call for a December rate cut, which we previously viewed as a close call. Furthermore, inflation pressure remains notably absent. This supports our view that the RBNZ will eventually lower the OCR below 2.5%.

Last week was a pretty quiet one on the domestic data calendar. However, what little news we did receive continued to reinforce the theme we’ve been highlighting in recent weeks. That is, economic activity remains solid for now, but storm clouds are still brewing on the horizon. Clearly illustrating this theme last week were September quarter retail trade data and the latest GlobalDairyTrade auction.

As expected retail spending growth rebounded in the September quarter, after taking a breather back in June. The volume of goods sold rose 1.6%, leaving sales up 5.7% for the year. The combination of low interest rates and rapidly rising house prices is a favourable one for most consumers and has encouraged them to spend relatively freely. Add to this strong population growth, and retailers are benefitting from solid growth in spending.

But for retailers (and indeed the broader economy) the key question is how much longer can this pace of spending growth be maintained? Our view is probably not much longer. There are three areas which will prove particularly important in this regard.

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