Retail sector 'could slide into recession'

Retail confidence has plunged to a five-year low, suggesting the key sector may soon slip into a recession, the Bureau for Economic Research (BER) warned yesterday.

Its index for retail business, which comprises 14% of the economy, fell to 52 points in the first quarter of this year from 71 points in the previous quarter, suggesting sales volumes contracted in that period.

Rising inflation and slower consumer spending, the main engine of economic growth, had eroded profit margins and sales were also expected to fall in the second quarter, the BER said.

Two successive quarters of contraction would technically put the retail sector — which has been hardest hit by rising interest rates — into a recession.

“The BER has made a significant downward revision to its forecast for overall consumer spending,” senior economist Linette Ellis said.

“We now expect it to increase by between 2% and 3% in 2008, compared to an estimated 7% in 2007 and 8% in 2006.”

The Reserve Bank's quarterly bulletin, due today, will shed more light on how much household consumption waned in the final quarter of last year.

Falling sales?

Figures from Stats SA today will also show whether retail sales fell in January, after declining by 0,5% in December and 0,2% in November — the first annual falls in five years.

Retailers have been hit the hardest by a cumulative four percentage point increase in lending rates since June 2006, which is expected to curb economic growth to between 3% and 4% this year from 5,1% last year. They have also suffered from a spate of unplanned power outages in January.

Small firms that cannot afford to buy backup generators have been most affected, and business groups have warned power constraints could force many small retailers to close.

The BER retail confidence index has tumbled from a record high of 91 index points to 52 points in the second quarter of last year.

“In the past, such a dramatic turnaround in and low level of retailer confidence typically signalled the beginning of a recession in this sector,” it said.

Growth slows

Quarterly gross domestic product data from Stats SA has shown that growth in retail trade, which includes hotels and restaurants, has slowed for five quarters in a row. But the sector still managed to grow 2,1% in the final quarter of last year. This was unlikely to carry on in the first quarter, the BER said.

Retailers for semi-durable goods such as clothing and footwear, non-durable goods such as food and beverages, and durable goods like furniture and household appliances all reported lower sales volumes.

“Furthermore, the majority of the BER's respondents expect retail sales to continue to contract during the second quarter of 2008,” it said.

The fall in confidence could also be blamed on increasing margin pressure and plunging profitability, which may reflect the inability of retailers to pass on rising costs to consumers.

Inflation has soared in the past year, with the headline consumer price index surging 9,3% in December.

The BER carried out its latest survey of 500 retailers between February 4 and March 3.

Source: Business Day

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