What the Christmas figures really tell us

OPINION: Every year as Christmas spending gets under way in earnest there is a company involved in processing electronic transactions which reports how much spending has increased compared with the previous periods, writes Tony Alexander this week.

And every year the emphasis is on how the growth looks strong and everyone is out happily opening their wallets.

Most years the data gives a completely inaccurate picture of what is really happening – mainly because there is more to retail spending than just a sample derived from one particular payment method.

Just last week we learnt that rather than soaring and confirming good spending growth in association with near-record consumer confidence levels, we in fact closed our wallets over Christmas. In December, retail spending after adjusting for seasonal influences and removing the ever-volatile car sector fell by 1.8 per cent from November.

Surveys show we are feeling happier about the world, but there is more in play than just confidence when it comes to whether we spend or not. The labour market, for instance, remains weak and we are wary of committing ourselves to debt payments which could prove very burdensome if we get laid off or lose some work hours.

The unemployment rate is 7.3 per cent and there are many reports of hundreds of people applying for positions which when advertised two to three years ago may have attracted only one or two applicants.

Our reluctance to borrow is seen clearly in the monthly debt numbers. In December, total household debt was only 2.7 per cent ahead of a year earlier. This is the lowest calendar-year rate of growth on record. Monthly debt is growing only 0.2 per cent with no sign of lifting.

Will we spend more as the year progresses? We believe so, for a range of reasons. First, net migration inflows are running well above the 12,000 per annum average at over 20,000. More people means more spending.

Second, house building is recovering – possibly more slowly than we were thinking earlier – from four-decade lows. More houses means more buying of furnishings.

Note, however, that at just over 14,000, annual dwelling consent numbers are well away from the near 24,000 needed on average to house the growing population.

That is why any price impact from coming tax changes will probably be quite limited.

Third, we have kept our spending in check since the middle of 2007 and there will be a lot of goods that are worn out and need replacing.

Fourth, and in similar vein, when times are tough we put off buying big things. As things look better, we catch up on that spending. This effect is not noticeable yet, outside of cars, but is likely to come through the year.

Fifth, we expect the labour market to start improving soon, given near average business employment intentions revealed in surveys plus plenty of anecdotes about more jobs being advertised.

Sixth, the world economy is improving and this will tend to support jobs growth and spending growth – most notably with regard to improved sales of goods and services to the firmly growing Australian economy.

The probable increase in GST to 15 per cent in October may disturb the spending pattern through the year, but the trend is likely to be up. One must remember that the rise in GST is only going to happen because of the desire to cut personal income tax rates. Lower tax rates will free money for extra spending.

Improving retail spending in 2010 won't stop a number of retailers from failing. But at least there is more solid light at the end of the tunnel and perhaps before the middle of the year the risk bias for inventory management will be able to shift from deliberately under-ordering to building some extra stocks just in case things turn out strong over 2011. We are not at that point yet, however.

» Tony Alexander is the chief economist for the Bank of New Zealand.

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