Fears of retail recession as sales fall

The rising cost of debt, soaring inflation and a sharp slowdown in growth of disposable income has curbed consumer spending, the economy's main growth engine, since 2006.

Analysts said things would get worse before they got better, with light at the end of the tunnel only likely to appear when inflation starts falling next year, paving the way for cuts in interest rates.

“Growth in real retail sales has been in negative territory for three consecutive months, setting the scene for a recession in the sector,” Standard Bank economist Johan Botha said in a research note.

“The outlook remains poor over the medium term ... retailers are not only suffering falling demand but also rising input costs, which have consistently impacted on profitability,” he said.

Retail and wholesale sales is the economy's third-biggest sector, making up about 14% of gross domestic product.

This sector has been hit hardest by a five percentage point cumulative rise in lending since June 2006, which has driven prime lending rates set by banks up to 15,5%.

As it takes changes in interest rates up to two years to take full effect, there is likely to be more pain in the pipeline for local consumers and retailers, with tougher credit rules introduced last year also taking a toll on demand.

“This news continues to fulfil our forecast that retail sales will decline for most of 2008,” Investec economist Annabel Bishop said.

“Retail sales growth will tentatively turn positive in the second quarter of 2009 … and then strengthen during the year if rate cuts and lower inflation materialise as expected.”

Reserve Bank governor Tito Mboweni said earlier this month that SA households have finally responded to higher interest rates, with their debt falling to 76,7% of disposable income in the second quarter from a record 78,2% in the first.

That was the first decline in the ratio since the final quarter of 2003, and supports the case for lowering interest rates next year — provided that inflation also starts to subside.

In the three months to the end of July, retail sales contracted 3,4% versus the previous three months, after adjustments for inflation, Statistics SA said.

Sales also fell 1,8% over the first seven months of this year compared with the same period last year, the data showed.

This was despite the fact that a new survey sample backdated to 1998 raised the level of retail sales for the three months between April and June by 1,6%.

That led to upward revisions in the data for that period, with a 0,1% decline in April revised to a 0,2% increase.

The fall in May was revised to 3,4% from 4,2% while the June decline was revised to 1,5% from 2,6%.

In the detail of the data, sales of durable goods rose by an annual rate of 3,4%, down from 11,1% in June — and after eight months in a row of declines.

Sales of pharmaceutical and medical goods rose a robust 23,3% while sales of textile, clothing and footwear — which are also sensitive to interest rates — rose 14,3%, down from 16,8% in June.

Source: Business Day

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