Should retailers be concerned? Yes. The weak recovery has been halted by the recent Canterbury earthquakes, and consumer confidence has fallen. Retail spending as a proportion of overall private sector consumption expenditure continues to trend down.

Nationally, retail sales turnover was essentially static in the December quarter, falling by a negligible 0.1 percent in seasonally adjusted terms. Volumes fared slightly worse, dropping by 0.4 percent.

The relatively greater drop in volumes provides evidence of price reductions and margin cutting in recent months in some retail industries. More than three quarters of the 13 core retail trade industries experienced price deflation in the December quarter. However, rising fuel prices ensured resulted in a 3.8 percent increase of the retail price index for the fuel industry.

Scanning across the country, only Auckland saw an increase in seasonally adjusted sales in the December quarter, and this was a modest 0.2 percent rise. However, this rise in values was unlikely to have been matched by a rise in volumes given the extent of retail price deflation having been recorded. The Waikato and the provincial North Island saw the greater falls, of -2.7 percent and -1.9 percent, respectively, while Wellington and Canterbury remained unchanged.

The Prime Minister has continued to express concern over national debt, and has encouraged restraint. He reiterated in late March that he is “worried about New Zealand’s overall level of indebtedness and one of the ways to do that is to spend less.” In the short term, the recession has forced restraint on New Zealand households, and debt accumulation has slowed.

•The number of housing loan approvals fell by 21.5 percent in the year to February 2011 compared to the previous year, and the value of housing loan approvals was 19.6 percent lowerThe overall value of house loans in January 2011 was 1.9 percent higher than a year ago, which was around one third of the rate seen in late 2008 (6.8 percent p.a. to September 2008) and one seventh of the rate seen in 2007 (13.7 percent p.a. to September 2007).

• The growth in outstanding credit card balances dropped from a 7 percent average in the five years before the Global Financial Crisis (GFC) to half that (3.5 percent) post-GFC, and further to 2.6 percent growth over the past year.

• EFTPOS sales (via debit cards) appear to have returned to trend, as consumers are still hesitating to load up their credit cards. Spending on credit cards grew by 2.5 percent over the year to December 2010 (which, again, indicates little real or volume growth), while spending on debit cardsgrew by 5.8 percent.

However, consumers’ short-term restraint is unlikely to be a solution that is consistent with rising living standards in the long term. A long-term solution has to come from raising incomes to support our desired level of prosperity, rather than lowering debt per se. As we have noted before, this requires a meaningful and sustained change in New Zealander’s consumptionand saving habits. Saving has to flow to investment in productive assets that support our aspirations of economic prosperity and wellbeing.

While people are now holding on to their jobs, employment growth is unlikely to see strong growth very soon. Combined with a subdued housing market, restraint on building up mortgage and credit card debt,and backed by low consumer confidence, we expect the retail trade sector to face a bleak, but weakly positive, near term. The Rugby World Cup later in the year will provide a temporary boost to the tourism sector, which will benefit the accommodation and food retailing sectors, as well as the flow on to other tourism-related industries.

Over the medium term, the reconstruction in Christchurch will boost some of the construction-related retail trade industries, plus the general recovery will lift employment across the country.

The forecast is for weak growth in retail sales volumes of 0.3 percent in the year to March 2011 quarter, but with a contraction in the core industries of -0.2 percent. We expect core retail sales volumes to grow slowly across 2011. A positive spike coming through in the latter half of the year with the tourism and wider activity generated by the World Cup that will contribute to retail sales volumes growing by 1.0 percent in the year to March 2012. We expect the reconstruction efforts in Christchurch will start to have a positive effect on the retail trade sector towards the latter part of 2012 and carrying on into 2013. This is likely to benefit the core industries (i.e. excluding the vehicle-related retail industries). In the year to March 2013, we forecast an annual 2.3% expansion in volumes across the sector and an annual 2.5% expansion in the core industries..