New Zealand retail sales in a striking advance.

Retail sales in New Zealand soared 3.8 percent in the quarter ending in March 2007. Sales were us$405-million. The increase is the fastest on record. New Zealand began tracking retail sales in 1995.

The graph above clearly shows the magnitude of the March 2007 increase. The data comes from Statistics New Zealand (June 2007) and the graph is showing the percentage increase in seasonally adjusted per capita retail spending (in yellow).

The seasonally adjusted figures dampen the regular spikes that show up in the final quarter of every year.

The graph also shows a linear trend line (in light blue). Although numerous news outlets commented on the surprise of the retail sales surge, it is worth noting that in spite of a precipitous downturn beginning mid-2005 and lasting well into 2006, overall per capita retail sales show an upward trend.

The answer to the obvious question of what is behind the current record surge in retail spending was answered in a June 7, 2007 posting on the website of The Treasury, New Zealand. The posting said that New Zealand house prices have been growing for some time, and that the enhanced wealth effect of property values are chiefly responsible for the record retail spike.

Underscoring the strong foundation of the retail sales increase were two additional facts-as reported by the news aggregator Stuff.co.nz (Wellington) on May 14, 2007. Vehicle sales were up 6.3 percent at the end of the first quarter 2007 at us$115-million. And, for the same period, appliance sales rose 9.1 percent to us$80-million.

In addition to the effect of housing wealth, New Zealand's consumer spending spree was stimulated as well by falling oil prices and increased wages, which are in turn the result of one of the tightest labor markets in recent years.

Of the housing market, a May 14, 2007 story filed from Wellington by Reuters said, "Residential property prices have been rising by more than 10 percent a year, but some analysts think the latest rise in mortgages rates may cool demand."

The Reuters comment raises another obvious question. With the tight labor market, rising wages, and record consumer spending, what is the Reserve Bank of New Zealand (RBNZ) likely to do with interest rates?

Reuters pointed out, "The strength in housing and consumer demand, underpinned by a tight labour market and wages growth, have been the main inflationary concerns for the Reserve Bank of New Zealand, which raised interest rates for a second straight month in April."

There appears to be a consensus that the RBNZ will raise interest rates further.

In The Treasury's April 2007 review of the New Zealand economy it offered the opinion that, "Strong consumer spending is expected to continue in the first half of 2007." The Treasury added the fact that the New Zealand economy's capacity utilization registered 91.8 percent with the quarter ending in March 2007.

The Treasury observed, "This high level indicates that firms are running near capacity." It said further that activity at 14 percent of firms in the country was affected by capacity constraints. The treasury cited The Quarterly Survey of Business Opinion (QSBO) for its information.

While surging consumer spending is certainly welcome, the inflationary pressures it generates certainly are not.

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