Opinion | Is a retail recovery on the cards?

New Zealand has seen more than its fair share of economic bad weather over the last three years. By some measures this has been the longest period of subdued economic activity in the post-World War II period. And nowhere has this been felt more than in the retail sector. Retailers large to small have been hit with slower sales, with some of New Zealand’s oldest retail names either downsizing or leaving the market entirely.

We are however, now starting to see the light at the end of the tunnel and the retail sector’s expectation is that we will begin to see a return to ‘normal’ levels of activity by year end 2024.  

The question is, what’s driving the turnaround and when are we likely to see a true recovery of sorts?

Although the narrative for retail sales has been somewhat negative over recent years, total retail sales for all core industries according to Statistics NZ, is still sitting 8.5% higher than it was two years ago. Part of this is due to inflation however what this also tells us is that retail sales have not ‘fallen into a hole” over the same period. These numbers represent a total growth of $7.4b over the past 24 months. This underlies in part a recovery from the post Covid period. In the last 12 months we have seen several key sectors outperform the otherwise subdued trajectory in the retail sector.  Accommodation has continued to recover (7.0% growth over the past 12 months), Food and Beverage spending which takes place mainly in restaurants and takeaways is up (3.8% over the past 12 months) and spending in the Supermarket and Grocery sector has improved (up 5.3% over the past 12 months).

So in short, although retail spending appears to have been both up and down in recent times and up and down across different sectors, for the most part it remains positive over the longer term. What’s more the outlook for those key elements of the economy that support retail spending is likely to continue to improve meaning retail sales themselves should track in the same direction.

Tourism numbers continue to recover with the total number of tourists visiting New Zealand in the year to August 2024 reaching 3.22m. This number is down on the 3.8m tourists that were visiting New Zealand annually pre-Covid, however, the August 2024 number is a 19.8% improvement on the year before. This increase alone represents more than $1.7 billion of additional spending in the economy over the past 12 months from tourists visiting New Zealand. Internationally we are seeing certain destinations become overcrowded with tourists – think European capitals this summer. This indicates that globally the appetite to travel remains strong. This trend combined with the fact that Chinese tourists are now returning to New Zealand in greater numbers, means we are likely to continue to see tourism to continue to improve over the long term.

Unemployment numbers have continued to grab the headlines as is expected in a recession and this often has an impact more on sentiment than actual true economic performance. Greg Ip of the Wall Street Journal states that “peoples’ views about the general state of the world and country spill over into their views about the economy”. So in a post-pandemic world where we see headlines about an abattoir in Feilding closing down or a mine in Masterton shutting, consumers in Auckland fear the worst. In reality, there are 75,000 more people employed in New Zealand today than there were two years ago in September 2022. Unemployment rates have increased, but so too has the actual level of employment. And whilst certain regions are down, Wellington employment has remained at the same level it was in September 2022 whilst in Auckland and Canterbury it has increased. There are today, more full wallets in the big centres than there were at the beginning of the recession.

The key issue is clearly one of confidence, however, that too is on the mend. The Roy Morgan consumer confidence survey saw the future conditions index rise in September 2024 from 100.5 to 105.6. This is not as high as it has been historically, but the overall index is today some 30% higher than it was at the beginning of 2022.

Looking forward we know that there will be a positive impact on sentiment and spending from ongoing interest rate cuts. Every quarter of a percent cut in interest rates puts another $885m per annum into the economy. We have had 0.75 basis points of cuts already which is worth $2.67 billion annually. Noting that interest rates topped out at 8.64% (RBNZ) and that the ANZ forecasts home lending to ‘bottom out’ at circa 5.0% we can expect to see some $12.9b plus to be available to consumers through to the next 18-24 months. There is an expectation that some of this will go to deleveraging in the early part of the cycle, however, the balance of this will also find its way into the tills of retailers around the country.

The government too is playing its part in all of this. The tax cuts introduced in June 2024 are forecast to add $14.7 billion over four years into the economy. This is more likely to impact the spending habits of lower to middle income taxpayers. When this spending is combined with interest rate cuts across the board this will likely have a significant economic punch. These two numbers added together represent 4.0% of New Zealand’s total GDP annually.

So, by many measures we are not out of the woods yet, but it appears that there is reason to cheer as we head into 2025. The last few years have been hard, but those retail owners and occupiers who have managed to weather the storm are likely to see a return to normal. So, here’s to Christmas, just perhaps Christmas and 2025!