Retail sales have contracted in five of the eight months to August and analysts expect September to show an even larger annual decrease of 6.9%.
According to the Reserve Bank's September quarterly bulletin, household debt fell for the first time in nearly five years, while the broadest measure of domestic consumption shrank at its fastest pace since 1999 in the second quarter of this year.
Growth in consumer spending, the economy's main engine, slowed sharply in that period, backing evidence of the mounting toll taken by higher interest rates.
Household debt sank to 76.7% of disposable income from a record of 78.2% in the first quarter, after clocking up successive peaks over the past few years.
But debt costs still edged up to 11.6% of disposable income from 11.3% — levels last seen in 1999 — reflecting the Bank's decision to raise interest rates by half a percentage point in both April and June.
“The increase in the price of fixed expenses has decreased the demand for both durable and luxury goods as is clearly evident in the sales reported by retailers. For example, household furniture and equipment sales contracted by an average of 2.8% annually for the year to August compared to a 9.6% increase in the corresponding period last year,” Efficient Group economist Doret Els said.
“We expect sales to experience pressure for quite some time going forward though the consecutive decreases in the fuel price and an easing in general inflation pressures might provide some support to the consumer's wallet,” Els said.
Consumer spending grew a mere 1.2% in the second quarter after growing 3.3% in the first quarter, extending a slowdown that began early last year.
Growth in disposable income slowed to 2% in the second quarter from 2.6% in the first quarter — far below the peak of 9% in the last quarter of 2006.
Analysts said this reflected the fact that pay increases were not keeping up with inflation and should back the case for the Bank to hold interest rates steady for the rest of this year.
The Reserve Bank has raised its key repo rate by five percentage points to 12% between June 2006 and June this year, gradually curbing economic growth.
Inflation measured by the annual rise in CPIX, which excludes mortgage costs, rose a record 13% in July and is set to climb more this year as electricity tariff hikes feed into prices.
Manufacturing data to be released on Wednesday was expected to show an increase in production for September as a result of statistical reasons.
In last year, production contracted 0.6% annually as labour strikes, especially in the motor industry, hampered the sector. Hence, a low base was created for annual comparisons in September this year.
Statistics data concerning the utilisation of manufacturing production in August showed a decrease in that of five out of the 10 manufacturing divisions. The sector was faced with a significant slowdown in domestic demand as the tighter monetary environment continues to cool down both business and consumer activity.
“The countries where the majority of these products are exported to, US and Europe, are quite possibly already in an economic recession, reducing demand even further,” Els said.
She said the effect of economic slowdown in the US and Europe was already evident in the latest National Association of Automobile Manufacturers of SA figures that showed a slump in vehicle sales in September.
ArcelorMittal announced plans this week to cut local steel production by as much as a third.
Mining production figures for September are also expected to reflect a further pounding.
Source: Business Day
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