January marks start of a broad tapering off in retail

While month-to-month fluctuations in real retail sales can be significant, it is believed that the January number marks the start of a broad tapering off to lower and more sustainable levels of growth.

The spike in growth last year came on the back of a significant improvement in economic growth, but was also supported by strong growth in unsecured credit, with banks having eased up significantly in that area of personal credit since the 2008/9 recession.

In addition, we had already seen the value of new vehicle sales (StatsSA figures), a good leading indicator, rise sharply to 33.3% year-on-year growth in September 2011, and this is usually a good leading indicator for the economy, and often for the rest of the retail sector as well.

However, since September, vehicle retail growth has slowed to 5.7% year-on-year by December, which had suggested that the recent retail sector "growth spike" would probably not be long-lived. In addition, it is difficult to believe that non-mortgage household credit growth can continue to accelerate further, given its recent growth rates of near to 20%, and indeed, like retail sales, after a 2nd mini-resurgence in growth from October to December, non-mortgage household credit growth slowed slightly to 18.2% in January 2012.

This does not mean that we expect a major weakening in real retail sales growth. However, its recovery off the low base of the recession was bound to be sharp, with high single-digit growth rates being achieved. Moreover, a few years down the track, it seems unlikely that, off a higher base, growth rates above 5% can be sustained in an environment where the economy battles to sustain 3% real growth rates.

Retail price inflation

Retail prices as a whole continue to present little in the way of trouble for the household sector. Year-on-year retail price inflation accelerated slightly in January to 4.6%, from a previous 4.3%. The mild general rise can ultimately be expected to exert some mild downward pressure on overall retail sales growth.

Encouragingly, retail food price inflation, recently the trouble area of retail prices, appears to be subsiding a little from a previous month's 10.2% year-on-year to 9.4% in January. However, this improvement has been offset by mild rises in price growth in all of the other major components, namely hardware, general dealers, furniture and appliances retail.

With food prices currently appearing to be the "trouble-spot" in the retail sector at present, 'Specialised Food, Beverage and Tobacco retailers' remain the underperforming area of retail. They experienced below-average real sales growth of 3.4% year-on-year respectively for the 3 months to January. This is a slight decline from the 4% for the three months to December.

Home maintenance-related spending may level off

Of the various sub-categories within overall retail sales, retailers selling hardware, paint and glass products in recent times have been a key driver of the strong overall retail sales numbers. This, we believed, was a sign that levels of home maintenance were starting to 'normalize' following the household financial shock experienced from the recession and the period of high interest rates up until mid-2008.

It may well be that the rise in levels of maintenance is beginning to cool off and we have seen year-on-year growth in real retail sales by hardware, paint and glass product retailers pulling back to year-on-year growth of 8.6% for the three months to January, from 15.7% as at November.

Retail sales growth expected to moderate

After a second "resurgence" in real retail sales growth late in 2011, we believe that the slower January growth number is the start of a broad moderation in real retail sales growth from very high single-digit rates.

The high rates of growth in 2010 and 2011 had much to do with major interest rate reduction in 2009/10, a recovering economy in 2010 and the volumes all coming off a low base created back in the recession.

Currently, the base is higher, there is no further interest rate stimulus and the economy continues at mediocre growth rates nearer to 3%. Under such circumstances, it would appear unrealistic for retail sales growth to continue at strong rates well above 5%.