Retail sales growth unlikely to alter rate outlook

Retail sales growth unlikely to alter rate outlook

RETAILER NEWS

Business Live - Nov 17th 2011, 11:06

Retail sales growth which continues to surprise on the upside is unlikely to alter the interest rate outlook, with rates likely to remain unchanged at 36-year lows until the fourth quarter of 2012 at least, according to economists. 

While stronger retail sales are encouraging, they say, the overall growth picture remains subdued and with household debt still so high, consumers are expected to spend cautiously this festive season.

"From a monetary policy perspective, we remain of the view that still weak pockets within the SA economy and intensified global concerns related to the sovereign debt situation in Europe (downside risks to growth), coupled with upside risks to inflation, should leave the MPC content in leaving interest rates unchanged for longer. We continue to look for monetary policy normalisation to commence only in Q4 2012 as a result," says Absa Capital's Jeffrey Schultz.

However, he says real retail sales growth which rose by 8.3% year-on-year in September from a revised 7.1% growth in August bodes more favourably for third quarter GDP, although supply-side sectors are likely to remain a drag.

"With household debt still so high," says Standard Bank economist Shireen Darmalingam, "we expect consumers to spend cautiously this festive season. Macroeconomic activity has lost momentum over the past months, resulting in economic growth forecast reductions. Despite significant formal sector employment in Q3:11, employment growth is also likely to stay weak. Labour markets generally lag GDP growth, implying that any meaningful revival in the market is still some way off. The bleak employment outlook is thus likely to continue, thereby constraining spending.

"The rising inflation profile won't support spending over the coming months as CPI might breach the upper limit of the 6% target. Indeed, Standard Bank expects a breach of this inflation target by year-end, and the SARB is concerned that it will stay there in 2012," Darmalingham adds.

"According to the BER's measure of consumer confidence," she says, "consumers' rating of whether it is a good time to buy durable goods, as well as consumers' outlook on their own finances, has improved in Q4:11, but not enough to counteract a decline in opinion on the outlook for the local economy. With consumer fundamentals fragile, we expect a loss of appetite for spending."

She adds: "Mounting inflationary pressures, coupled with weak domestic economic growth, could see the SARB keeping the benchmark lending rate at a 36-year low in 2012. The SARB is concerned about protracted upside risks to inflation. Nonetheless, we believe that the MPC will provide further stimulus if economic growth deteriorates substantially in the coming quarters."

Commenting on the retail trade sales data, Nedbank's economic unit says retail sales, particularly of non- and semi-durable goods, will be boosted by spending ahead of the festive season.

"Stronger retail sales is encouraging. However, the overall growth picture remains subdued. Despite rising inflation, which is mainly due to cost-push factors, we maintain the view of unchanged interest rates until the third quarter of 2012," the unit adds.

STANLIB economist Kevin Lings cautions that South African consumers are facing increasing strain when it comes to disposable income.

"This is due to a range of cost-push factors that are systematically eroding the household sector's discretionary spending power. These include higher energy costs, transport costs, food 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 or take on additional debt.

"While the rate of growth in total consumer debt remains relatively subdued (mainly due to subdued mortgage finance), there has been a noticeable increase in the use of unsecured credit, suggesting that some consumers are starting to use short-term debt to offset the loss of discretionary spending power.

"In addition, as mentioned above, the most recent labour market report was surprisingly strong, which may also be slowing making a positive impact on consumer activity - we will continue to monitor the labour market situation extremely closely as it hold the key to sustainable growth in South Africa.

"Clearly, in isolation, the latest retail report would argue against a cut in interest rates, but will tend to boost the Q3 GDP reading," Lings adds.