The latest results from Ernst & Young/Bureau for Economic Research (EY/BER) Retail Survey points to a modest recovery in volume growth during the third quarter.
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According to Statistics South Africa, the growth in retail sales volumes slumped from 2.8% year on year (y-o-y) during 2014Q1 to 1.4% y-o-y in 2014Q2, the slowest volume growth since the end of the recession in 2009.
However, results from the EY/BER Retail Survey suggest that retail sales volumes improved slightly during 2014Q3, hinting that volume growth may have bottomed in the strike affected 2014Q2. Indeed, preliminary retail sales data from Statistics South Africa shows that volume growth recovered to 2.4% y-o-y during July 2014, in line with the BER's latest survey results.
According to Derek Engelbrecht, Retail and Consumer Products Sector leader at EY, the improvement in sales volumes was mainly concentrated in the hardware, paint and glass and semi-durable goods (e.g. clothing, footwear, sporting equipment, CDs and toys) retail sectors.
Official retail sales data from Statistics South Africa shows that the volume growth in these categories slowed substantially during the previous quarter, from 7% y-o-y in 2014Q1 to 2% y-o-y in 2014Q2, which is essentially what drove total retail sales growth lower during 2014Q2.
Engelbrecht says, "Factors such as a dramatic slowdown in unsecured credit extension, waning disposable income growth and rising inflation have been weighing on retail sales volumes in general over the last two years but the impact of these factors were compounded by the record long strike in the platinum sector during the first half of 2014. To the extent that strike affected consumers were forced to postpone their purchases of hardware, clothing and footwear, the end of industrial action in the platinum belt may have alleviated some of the downward pressure on these categories during the third quarter."
Furniture and household appliances sales hard hit
Although the reported improvement in clothing and hardware sales volumes is good news, the survey results also showed that non-durable goods sales volumes (e.g. food, beverages, tobacco products, cosmetics and pharmaceuticals) and furniture and household appliances sales volumes remained under pressure during 2014Q3. Furniture and household appliances sales volumes have been particularly hard hit by the slowdown in unsecured lending, coupled with the inflationary impact of the dramatic depreciation in the rand exchange rate on imported goods. In turn, consumer spending in non-durable goods has been constrained by poor job creation, lost income due to strikes, slower growth in social grants expenditure and soaring food and fuel prices.
"The strike in the metals and engineering sector during July will still weigh on economic growth, and hence disposable income, during the third quarter. However, the slight deceleration in the CPI inflation rate and the 67 cents drop in the petrol price in September should bolster the purchasing power of households and aid retail sales volumes in coming months."
Retail confidence improves over past 30 months
Having recovered from 39 to 49 index points during 2014Q2, the business confidence levels of retailers improved further to 60 index points during 2014Q3. This is the first time in two and a half years that more than 50% of the retailers surveyed by the BER reported that they are satisfied with prevailing business conditions. Given that retailers reported only a marginal acceleration in volume growth during 2014Q3, while profitability levels remained under pressure from high input cost pressures, it is surprising that the confidence levels of retailers rebounded quite so strongly.
However, the majority of retailers expect business conditions and retail sales growth to improve further during the festive season, which may help to explain their increased optimism.
"Boosted by the end of debilitating strikes in the platinum and engineering sectors and the moderation in inflation, the growth in retail sales may well improve compared to the very weak growth recorded during the second quarter of 2014.
Nevertheless, given slower growth in government spending, relatively weak job creation prospects in the near term, added downward pressure on household unsecured credit extension, following the collapse of ABIL, and recent and expected further interest rate hikes, the growth in retail sales volumes is projected to remain subpar during the festive season and in the first half of 2015," concludes Engelbrecht.
