Retail sales fall fastest in nine years

It was the third month running that retail sales have fallen, suggesting the sector may slide into recession this year as higher debt costs squeeze household consumption. Statistics SA figures showed yesterday that in the first five months of the year sales were 0,4% lower than in the previous corresponding period when they rose 8,8%.

“The outlook for the sector remains bleak given further income erosion from rising inflation and interest rates,” said Standard Bank economist Danelee van Dyk.

“Retailers are not only squeezed by falling demand but also by rising input costs, which have lowered profitability.”

Retail trade makes up 14% of the economy, and is the third biggest sector after financial services and manufacturing.

Some analysts said the data may help persuade the Reserve Bank to keep interest rates steady at next month's monetary policy committee meeting after raising them five percentage points since June 2006.

But markets were influenced more yesterday by an Investec Asset Management report saying changes to the calculation of consumer prices, which take effect next year, mean that the targeted CPIX measure of inflation is already overstated by up to two percentage points.

That means monetary policy is too tight and interest rates should be as much as two percentage points lower, it claimed.

The report knocked bond yields, which move inversely to prices, up to 20 basis points lower, and prompted forward rate agreements in local money markets to price in a reduced chance of a rate hike next month.

Many analysts described the report, based on Stats SA data released two weeks ago, as “over the top” and “irresponsible”, given that it is impossible to predict exactly what inflation will be next year. But it forced markets to consider the chances of interest rates falling a bit sooner than expected, given mounting evidence that weakness in the economy is spreading.

“The controversy increases pressure on the Reserve Bank, and casts doubt over the inevitability of an August rate hike,” said Nedbank economist Johannes Khosa. “The probability of a neutral policy stance for the remainder of this year has increased significantly.”

Economic growth, which is driven mainly by consumer spending, slowed to 2,1% in the first quarter of this year from 5,3% before — a six-and-a-half year low.

But that was mainly due to the effect of power cuts on mining. Since then, surveys and data have shown that manufacturing output is subsiding while consumer confidence falls at its fastest pace in 24 years.

Some institutions, including Moody's, warn the economy will slip into recession for the first time since 1992. The treasury has poured cold water on this theory, and market consensus predicts growth of about 3% this year, down from 5,1% last year.

Many analysts also believe that rising inflation, which has breached its 3%-6% target range for 14 months running, will force the Bank to raise rates again. Inflation measured by the annual rise in CPIX rose 10,9% in May, and will climb higher this year as electricity price hikes take effect.

The retail sales figures showed that purchases of durable goods such as furniture and household appliances fell by an annual rate of 13,9%. That was the 12th annual fall in a row.

Source: Business Day

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