Consumer spending in New Zealand remains strong.

Consumer confidence in New Zealand dropped to a two-year low, according to a June 22, 2005 release posted on the NZTV Website. The confidence index, regularly prepared by Westpac-McDermott Miller, a private consulting/academic collaboration, dropped from 126.7 in the quarter ending in March 2005 to 120.2 for the current 2005 quarter. The decline in confidence was approximately 6 percent, raising concerns about trouble ahead for consumer spending and for economic growth in New Zealand.

There is some question, however, about whether or not consumer spending concerns are justified.

The chart above clearly shows that retail sales have been growing in 2005. A trend line drawn from the low point of the seven month series would certainly show a positive slope.

Moreover, a working paper prepared for The Treasury, New Zealand and published in September 2003 examined the relationship between consumer confidence and consumer expenditures. The paper, titled, "Does Consumer Confidence Forecast Consumption Expenditure in New Zealand?" provided a short answer to its own question: 'No'. The study did say, however, that confidence surveys did reflect current economic conditions well.

The chart on page 1 shows a peak in retail spending growth in November, possibly related to the approaching holiday season. This was followed by a dip in January - also typical retail experience - followed by strong growth, but not quite as strong as the November peak.

This accords well with the just released confidence numbers, particularly when seen with the perspective of the above referenced Treasury paper. New Zealand consumers are less optimistic about the economy's short-term prospects, but not so unhappy that they will rein in their spending. An index measure over 100 indicates optimists outnumber pessimists.

The NZTV release referenced on page 1 quoted the managing director of the private firm partner in the confidence survey to the effect that while retail sales might slow somewhat in the coming months, consumer spending was expected to remain strong, and to provide a foundation of support for New Zealand's GDP growth over the next six months.

Consumer spending is 60 percent of New Zealand's US$93-billion economy, according to an April 15, 2005 Bloomberg story carried by The International Herald Tribune (Neuilly Cedex).

Concern was expressed from a different perspective in a June 19, 2005 Reuters report in The New Zealand Herald (Auckland) saying that the country's balance of payments deficit was widening because of consumer spending on imports. The report also said that New Zealand's GDP growth for the first quarter 2005 was widely expected to be 0.8 percent.

The growth in spending and the corresponding current account deficit translate into an approximate shortfall in overall GDP of 6.7 percent. This in turn, puts pressure on New Zealand's central bank to take steps to control inflation.

According to sources quoted in the Reuters report, consumption at current levels demonstrates that New Zealanders are spending more than they earn.

In spite of the inflation dangers, the New Zealand economy has recovered from a slowdown at the end of 2004. It is expected this will be confirmed when official GDP figures are released.

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