Real retail sales drop 0.3% in November

This lifted real retail sales for the three months ended October to 7.6% year on year (y/y) from 6.0% y/y in the three months to end September before slowing to 7.3% y/y in the three months ended November.

The drop in real retail sales has added to pressure on the South African Reserve Bank (SARB) to cut the repo rate from 5.5% on Thursday. Earlier on Wednesday the consumer inflation data for December showed that inflation momentum as measured by the quarter-on-quarter (q/q) annualised rate (ar) slowed to 4.3% in December from 5.1% in November and 5.5% in October.

The q/q ar is very useful for analysis purposes as monetary policy works with a lag of some 18 months on inflation. That is why for instance economists focus on the q/q ar if they look at gross domestic product (GDP) growth momentum, rather than the year ago rate.

In May 2011, when many other central banks were raising rates in response to rising food and energy inflation, the q/q ar inflation rate peaked at 9.1%.

The Federation of Unions of SA (FEDUSA) is calling for an interest rate cut of at least 100 basis points (1%) in order to effectively stimulate the SA economy and begin to address the serious issue of unemployment.

"While the MPC is currently meeting to assess SA's price stability, FEDUSA would remind them to take account of the finance minister's letter to the SARB governor last year, where he explicitly requested the committee to be more flexible in their approach and also include other issues when considering the repo rate. We cannot afford to maintain interest rates at the current level if we are really serious about stimulating the economy and creating jobs," stated FEDUSA General Secretary, Dennis George.

FEDUSA has in the past and will continue to call on the SARB to firstly broaden the scope of the MPC's mandate, which is currently geared only at inflation targeting, and secondly to pursue a model of fiscal stimulus as opposed to fiscal austerity.

"Of course inflation targeting is important for the purpose of price stability; however this one goal cannot be pursued relentlessly to the detriment of sustainable economic growth and job creation. Many of SA's problems, including inflation, are structural in nature. Individuals, organisations and companies need to start thinking in a more creative and innovative way of how we are going to simultaneously tackle the problems of high unemployment, high administered costs, institutional rigidities and slow economic growth," said George.

FEDUSA's call to cut the repo rate in order to increase consumer spending and stimulate economic growth and job creation in their view is supported by the findings of the United Nations Department of Economic and Social Affairs (UN-DESA) World Economic Situation and Prospects Report 2012. The report labels current global policy responses to the ongoing sovereign debt crisis as highly inadequate, favouring austerity measures over fiscal stimuli halts recovery by exacerbating aggregate demand, further weakening the prospects of economic development and job recovery in the longer run.

"The world economy is teetering on the brink of another major downturn. Output growth has already slowed considerably during 2011 and anaemic growth is expected during 2012 and 2013. The problems stalking the global economy are multiple and interconnected. The most pressing challenges lie in addressing the continued jobs crisis and declining prospects for economic growth, especially in the developed countries. As unemployment remains high, at nearly 9%, and incomes stagnate, the recovery is stalling in the short run owing to the lack of aggregate demand. But, as more and more workers are out of a job for a long period, especially young workers, medium-term growth prospects will also suffer because of the detrimental effect on workers' skills and experience," the semi-annual World Economic Situation and Prospects report said.

Under the UN's pessimistic scenario, global growth would slow to 0.5% this year from an expected 2.8% in 2009 and 4.0% in 2010 when growth rebounded from a 2.4% contraction in 2009. In its optimistic scenario global growth would rise to 3.9% this year and 4.0% next year.

Economist Kevin Lings of Stanlib said the strains on the SA consumer are rising, despite historically low interest rates. Hopefully the labour market will keep improving, thereby alleviating some of the pressure on household income as well as the risk of a repeat of the recent spike in bad debts.

"In the first half of 2011 SA retail data was strong, but also relatively erratic. The volatility reflected a combination of base effects - with annual comparisons distorted by the World Cup in 2010 - as well as the timing of various public holidays. However, during the five month period from June to October sales were more consistently robust, beating analyst's expectations in most months," Lings noted.

He was fascinated by the relative out-performance of retail activity versus domestic manufacturing activity. This not only illustrates the plight of the SA manufacturing sector, but also highlights the fact that stimulating consumer spending does not necessarily provide an equal or significant stimulus to SA manufacturing.

Looking forward, SA retail activity is likely to face increasing strain according to Stanlib. This is due to a range of cost-push factors that are systematically eroding the household sector's retail spending power. These include higher energy costs, transport costs, education fees, medical service costs and water costs. Households cannot avoid these increases, as they relate to necessities or essential goods, forcing consumers to either cut-back on non-essential purchases (including general retail activity) or take on additional debt. The situation is aggravated by the relatively high increase in food inflation.

Standard Bank said consumers are faced with a number of headwinds that are likely to drive consumption lower over the coming quarters. In particular, consumers are concerned about their financial positions in 12 months' time. Tepid consumer confidence and softer household consumption expenditure are corroborated by the softer uptake of credit extension.

In their view the November retail sales data, following the better-than-expected December CPI data, is likely to sway the SARB to keep interest rates unchanged at the conclusion of the first 2012 MPC meeting on Thursday.

"While it is evident that consumers are still struggling, which does not bode well for GDP growth, the SARB has maintained its commitment to keeping inflation within the official target. We therefore maintain our base case scenario that the SARB is likely to keep the repo rate unchanged at 5.5% in 2012," Shireen Darmalingam from Standard Bank wrote in her reaction to Wednesday's data.

Barclays Capital was more optimistic and continues to see the consumer as key to growth this year. "Overall, we maintain our view that the consumer is likely to remain the powerhouse of SA GDP growth prospects in 2012, which should hopefully help to act as somewhat of a buffer to the still struggling supply side of the economy. This 'two-speed' nature of domestic economic growth, together with the very real downside risks to global growth and domestic inflationary pressures building and becoming more broad-based, leaves us expecting the SARB MPC to maintain interest rates at their current levels through much of 2012 until such time as it is comfortable that the real economy is strong enough to endure an interest rate normalisation cycle. We continue to pencil in the first interest rate hike for the fourth quarter this year," Barclays said in its research note.

Although the November retail sales figures surprised the market to the downside, Barclays continue to believe that y/y growth of nearly 7.0% remains respectable in the current challenging economic climate and supports the relatively positive trading updates given by a host of listed domestic retailers of late.

"We are further encouraged by the still strong momentum growth we continue to observe in sales where, on a seasonally adjusted and annualised q/q basis, sales growth was up 13.0% in November. The trade sector therefore looks poised for yet another robust quarter of growth and will no doubt remain one of the largest contributors to fourth quarter 2011 GDP growth when it is released on February 28. Certainly for the upcoming December 2011 retail sales print we would expect a further upbeat tone as consumers spent into the festive season," Barclays noted.

In their view, still strong consumer dynamics in the form of rising disposable incomes, low interest rates and robust growth in discretionary items of credit are likely to continue to keep the consumer and retail sales on a relatively firm footing in 2012. Key to this outlook, however, lies in the resilience of consumer confidence in the face of rising inflation, which eats away at real disposable incomes, and a still very uncertain global and domestic economic climate.