Rates weigh heavily on retail sales

Retail sales grew by a modest 0,2% in January versus the same month last year, marking the first annual increase in three months but showing the key sector is still hampered by higher interest rates, Statistics SA data showed yesterday.

Retail sales activity — which accounts for 14% of the economy — fell 0,5% in December and 0,2% the month before, fanning fears the sector may slip into a recession early this year.

Figures from the Reserve Bank yesterday backed the sluggish outlook for the economy's main growth engine, showing household spending slowed to 3,8% in the final quarter of last year from 4,4% in the third.

“While the marginal increase in January's retail sales exceed our expectation of a real contraction for the month, the outlook for this sector this year does not prove optimistic,” Efficient Group economist Doret Els said. A cumulative four percentage point hike in lending rates since June 2006 curbed consumer spending, while rising debt is now eroding disposable income, the Bank's quarterly bulletin for March showed.

A dubious record

Household debt edged up to a record 77,6% of disposable income in the final quarter, boosting debt service costs to 10,9% of disposable income from 10,2% in the third quarter, it said.

Climbing inflation is also helping to dampen a consumer spending spree, which gave prices leeway to rise at their fastest pace in nearly five years.

“The outlook for retail sales in the medium term is dim, given increases in food and energy prices,” Standard Bank economist Johan Botha said.

“Today's economy confirms what we know: parts of it are under severe strain,” he said.

The Bank left interest rates on hold at its last policy meeting in January, putting more weight on the rising threat to growth than the near-term inflation outlook, which had worsened.

The Bureau for Economic Research said earlier this week retail sales would probably contract in the first half of this year after its confidence index for the sector hit a five-year low.

Its retail index fell to 52 points in the first quarter of this year from 71 points in the prior quarter, also 39 points down from its record last year.

Not a true reflection

However, Investec economist Annabel Bishop said the poor retail growth rate also reflected a statistical base effect. When removed, sales would have been up about 4% year on year in January. “Due to the statistical distortion, the headline figure is not indicative of the true pace of consumer spending — it is unlikely to have stalled,” she said.

“Data from the independent retail liaison committee and the trade expectations index, both point to weaker, but positive, growth.”

However, Bishop said retail sales growth was likely to stay weak to negative for most of the first half of this year, due to base effects from 2006, marked by a “heady” spending spree.

Retail sales weakness now extends beyond the most interest rate-sensitive categories, such as new vehicles and furniture, to include semi durable and nondurable goods.

Source: Business Day

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