In our latest set of forecasts we incorporated a lift in retail prices following the introduction of GST in October 2010. However, the figures produced by Statistics New Zealand exclude GST – implying that the figures will not match up to our forecasts index. This article provides the figures excluding GST – and discusses why it is useful to look at both series together.
Core retail sales excluding GST
In both our March and July forecasts, we incorporated a lift in GST in our "retail sales prices" when working out the value of retail sales. However, the retail sales figure produced by Statistics New Zealand excludes GST – indicating that our numbers will not match up with the data that will be released. This fact was not clearly presented in our forecasts.
Our model estimates retail volumes based on retail prices including GST (as that is what impacts upon domestic demand). As a result, the volume figures are not affected by this difference.
However, it is useful to see what our actual forecasts of the value of retail sales (ex-GST) look like.
Simply put, excluding GST from the numbers implies that the value of retail sales from October 2010 quarter will be approximately 2.2% lower – implying that growth in sales over the intervening year will be weaker according to this measure.
One of the problems with looking at the retail sales figures excluding GST is that they incorporate all the price movement in the retail sector in a single quarter.
Although this is true in an accounting sense, we do not believe that firms will fully respond to the lift in GST immediately given:
- weak demand and high levels of competition in the industry – making it more difficult to increase prices
- uncertainty regarding consumers’ response to changes in the structure of the tax system – implying that retailers may want to put off price increases until they have more information
- a delay in lifting the price of some goods, as retailers leave any price increases for their respective pricing cycles (also known as "staggered pricing").
In this sense, the value of retail sales as published by Statistics NZ is likely to understate the true level of activity in the industry – as the observed drop in ex-GST prices will only be transitory.
This point is illustrated by the sharp reaction of prices if we exclude GST. As Graph 1.2 shows, we are forecasting a 0.1% fall in average ex-GST retail good prices over the 2011 calendar year.
Given that the including GST figure represents our outlook for domestic demand, but the excluding GST figure represents the retail trade survey statistics directly; we will provide both the including and excluding GST growth rates over the next year.