But analysts said it was too soon to make upbeat assumptions, given heavy debt overhangs for households, employment worries and looming price hikes for water, electricity, education and health.

Retail sales grew 4.6% in May compared with the same month last year, well above consensus forecasts for an increase of 3.6%, official data showed yesterday, 14 July 2010.

April revised

But Statistics SA revised the April increase down to 2.9% from 3.2%, and the boost to sales was seen as likely to stem in part from a spike in demand ahead of the World Cup.

"The data we've been gathering ... suggests that the picture is still one of broad weakness, even though consumption is on a recovery path," said Standard Chartered economist Razia Khan. The Reserve Bank would have to decide at its policy meeting next week how much of the rise stemmed from "froth" in the run up to the soccer and how much from real underlying strength in the economy, she said.

Local markets are pricing in a 40% chance of a half percentage point cut in interest rates next week, although most analysts think the Bank will keep its repo rate steady at 6.5%.

Nonetheless, speculation of a rate cut in local markets was scaled back somewhat after the data was released, which contrasted favourably with disappointing figures for manufacturing, the economy's second biggest sector.

During the month itself, sales rose by a seasonally adjusted 1.3%, after a 0.3% fall in April.

World Cup boost

"The strong pickup in retail activity in May was, at least partially, driven by the World Cup," said Stanlib economist Kevin Lings. This implied that sales for last month and this month would also be fairly robust, while activity in October and November would appear to "go soft", he said.

Retail sales account for about 12% of the economy's output and is the second-biggest employer, providing 22% of the jobs in the formal nonfarm sector.

"While retail confidence remains broadly upbeat, future concerns stem from the still bleak outlook for the financial position of consumers in 12 months' time," said Standard Bank analyst Shireen Darmalingam.

"This does not bode well for a sustained retail sales recovery."

In the US, retail sales fell 0.5% in June, below forecasts and showing that they are still struggling to gain traction after last year's recession.

Recovery mainstay

Retail activity would be the "mainstay" of SA's recovery later this year, taking over from inventory replenishment in the manufacturing sector, Thebe economist Monale Ratsoma said. Retailers recorded five months in a row of "real positive growth" after contracting at an average 5% last year, he said.

Wholesale sales fell 0.2% in May compared with April, other figures from Stats SA showed yesterday. Compared with the same month last year, sales rose 3.1%, in prices adjusted for inflation.

The volatile measure was showing signs of stability, Citigroup economist Jean-Francois Mercier said in a research note.

Positive sectors

Growth in retail sales of household and furniture remained robust, rising 17.7% year on year after a 19.9% increase in April. Sales of textiles, clothing and footwear quickened to 7.5% year on year, after a 6.7% increase the previous month.

Another encouraging sign came from sales of hardware, paint and glass, which rose 1.5% compared with May last year.

Ratsoma said lacklustre growth in borrowing by the private sector could back the case for a rate cut next week, although he sees rates on hold.

Overall private-sector credit extension rose 0.8% in May versus the same month last year, above forecasts and following a fall of 0.9% in April. Households drove the rise with credit up 3.8% year on year - the same pace as April - but borrowing by companies fell 1.5%, moderating from a 5.1% fall the previous month.

Source: Business Day