Retail sales drop over two months

Retail sales fell for the second month in a row in April, defying forecasts for a rebound and adding to evidence that consumer demand, the economy's main growth engine, has slowed sharply in response to rising interest rates.

Retail sales dipped 0.3% in April compared with the same month last year, after a revised annual fall of 1.5% in March — all at constant prices, adjusted for inflation. That compares with forecasts for sales volumes to rise 1.8% because of more working days in the month.

Economists said the sector, which accounts for 14% of the economy, was set to remain under siege until interest rates started to fall — which might not happen before 2010, given the bleak outlook for inflation.

Many still expected another rise in lending rates at the Reserve Bank's next policy meeting in August, as the effect of steep electricity tariff and wage increases stored price pressures ignited by the soaring global cost of food and fuel.

“With inflation on an upward trend, another 50-basis point interest rate hike in August is very likely,” said Efficient Research economist Doret Els. “The pressure on consumer spending is unlikely to ease and the retail picture is therefore likely to get bleaker before it gets better,” she said.

Interest rates have climbed by five percentage points in the past two years, taking prime lending rates up to 15.5% — a five-year peak.

This has pushed debt costs as a ratio of disposable income for households up to more than 11% and curbed growth in spending to 3.3% in the first quarter of this year, from a peak of 9.5% in the last quarter of 2006.

The data from Statistics SA on Wednesday showed that retail sales grew 0.3% in the first four months of this year — well below the 8.9% rise in the same period last year.

More stringent credit rules introduced a year ago have eroded consumers' spending power and moderately curbed credit demand, which many believe is buoyed by “distress” borrowing to finance existing debt.

“The Bank will be relieved that retail sales have not, at least so far, crashed, given the bitter monetary policy medicine,” said Standard Bank economist Johan Botha. However, he warned that the medium-term outlook was "dim" given rising inflation, the rand's volatile exchange rate, a weaker labour market and slower income growth.

“There is no let-up for consumers; the effect of the June hike in interest rates will add to the misery in the months to come and another rate hike in August is a strong possibility. More generally, there is no respite on the horizon,” he said.

News that municipal electricity tariffs would rise by about 36% this year would add to the burden on local consumers, already saddled with soaring prices for food and fuel.

The headline measure of consumer inflation rose 11.1% in April — its highest since January 2003. Inflation rates for SA's poor majority are rising fastest, climbing by about 13%.

A breakdown of Wednesday's figures showed sales of durable goods were hit hardest, falling 9.6% in the past three months — at nominal prices. That makes sense as appliances and furniture tend to be the most sensitive to interest rates changes.

The official data tally with figures from the retailers' liaison committee, an industry body. They show retail sales growth slowing to 0.1% in April from the same month last year.

Source: Business Day

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