In our latest set of forecasts weincorporated a lift in retail prices following the introduction of GST inOctober 2010. However, the figures produced by Statistics New Zealand exclude GST â€“ implying that the figures will not match up to our forecasts index. This article provides the figures excluding GST â€“ and discusses whyit is useful to look at both series together.
Core retail sales excluding GST
In both our March and July forecasts, weincorporated a lift in GST in our "retail sales prices" when working out thevalue of retail sales. However, the retail sales figure produced by StatisticsNew Zealand excludes GST â€“ indicating that our numbers will not match up withthe data that will be released. This fact was not clearly presented in ourforecasts.
Our model estimates retail volumes basedon 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 ouractual forecasts of the value of retail sales (ex-GST) look like.
Simply put, excluding GST from thenumbers implies that the value of retail sales from October 2010 quarter willbe approximately 2.2% lower â€“ implying that growth in sales over theintervening year will be weaker according to this measure.
One of the problems with looking at theretail sales figures excluding GST is that they incorporate all the pricemovement in the retail sector in a single quarter.
Although this is true in an accountingsense, we do not believe that firms will fully respond to the lift in GSTimmediately given:
- weak demand and high levels of competition inthe industry â€“ making it more difficult to increase prices
- uncertainty regarding consumers’ response tochanges in the structure of the tax system â€“ implying that retailers may wantto put off price increases until they have more information
- a delay in lifting the price of some goods, as retailersleave any price increases for their respective pricing cycles (also known as"staggered pricing").
In this sense, the value of retail salesas published by Statistics NZ is likely to understate the true level ofactivity in the industry â€“ as the observed drop in ex-GST prices will only betransitory.
This point is illustrated by the sharpreaction of prices if we exclude GST. As Graph 1.2 shows, we are forecasting a0.1% fall in average ex-GST retail good prices over the 2011 calendar year.
Given that the including GST figurerepresents our outlook for domestic demand, but the excluding GST figurerepresents the retail trade survey statistics directly; we will provide boththe including and excluding GST growth rates over the next year.
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