Still signs of life in retail sales

Retail sales rose by an annual rate of 2,5% during the month, official data showed yesterday, quickening from an upwardly revised 0,7% in January and defying widespread forecasts of a decline.

If the trend holds, it may give the South African Reserve Bank some comfort at its next policy meeting in June, if a sombre inflation outlook prompts its monetary policy committee to raise rates again.

However, while a complete collapse in consumer spending now looks very unlikely, household consumption is still on a steady downturn, analysts say.

“Ultimately, we doubt that today's rebound in retail sales growth is sustainable,” said Citigroup economist Jean Francois Mercier. “We continue to expect consumer demand to be under pressure in 2008 from higher inflation, rising debt interest costs and slowing job creation.”

Retail sales have slowed in every quarter since the middle of 2006, when the Bank began raising interest rates to check inflation. They fell in both November and December, for the first time in six years.

Lending rates have now climbed by 4,5 percentage points, taking prime rates set by commercial banks to 15% — a near five year peak.

The figures from Statistics SA showed that sales of durable goods — the most interest rate sensitive category — continued to fall sharply. Sales of furniture and household appliances slumped 7,7% in the year to February, while hardware, paint and glass, and specialised food also performed poorly.

More upbeat

A “leap year effect” which led to an extra day of sales in February may have boosted retail sales during the month. Steady electricity supply after a spate of outages in January could also have encouraged consumers to resume shopping, Mercier said.

In a research note, Nedbank said the official data painted a more upbeat picture than did the Retailers' Liaison Committee — an industry body.

“Higher household debt, inflation and tighter access to credit should continue to weigh on consumers' purchasing power and keep retail sales under pressure,” it said.

“This will be exacerbated by electricity disruptions, which will hamper retail activity further.” Retail confidence dived to a five-year low in the first quarter of this year, according to a survey from the Bureau for Economic Research.

That fuelled fears of a recession in the sector, which makes up 14% of the economy (making it the third biggest). At the same time consumer spending accounts for two-thirds of gross domestic product, making it the economy's main growth engine.

“We expect retail sales growth to average 2,5% in 2008 in real terms, down from 5,1% in 2007,” Goldman Sachs said in a research note. However, it said this did not mean the economy was suffering from an “overdose” of high interest rates.

Source: Business Day

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