Retailers can expect an inflation-beating 9% increase in Christmas sales to R50,2-billion this year, but for many this will come too late as liquidations are set to continue at current record levels until the first quarter of 2004, says Credit Guarantee senior economist Luke Doig.
“An improvement in domestic demand is promising although growth is unlikely to exceed 2,75% in 2004 unless the global economy rebounds strongly, which appears especially unlikely in Europe,” says Doig.
According to Doig, debt to income status is currently low, which has seen a tendency for greater cash purchasing even though the Christmas period tends to rely largely on credit sales. However, this ratio is likely to come under pressure as a 5% drop in interest rates is more than likely to entice the consumer to extend their budgets by purchasing on credit.
The incidence of cash sales has been increasing over the past few years, improving to 77,6% last year from 76,7% in 2001 and further to 78,7% in the first seven months of this year.
“This is a welcome trend as we go forward into November/December, the period that traditionally constitutes 21,5% of annual sales. A cautious stance needs to be adopted with regards to the extension of credit given the backdrop of sluggish growth and higher company closures,” says Doig.
Company liquidations hit a two-year high in September of 466, 38,6% up on levels a year earlier. Doig does not anticipate any improvement in this deteriorating trend before the first quarter of 2004. He says that default judgments of R705-million in August — more than 15% higher than 12 months previously — is ample evidence that the status of financial health is not all that it is made out to be.
Positively talking the market up makes sound sense, but “sensibility” must still prevail, he adds.
Manufacturing sales have suffered this year from the recovering exchange rate with many traders substituting locally produced goods with imported ones. Production volumes have shrunk 2% in the first eight months of the year and manufactured goods sales were 3,6% lower in August than a year earlier.
By contrast, wholesale sales are 6,3% higher in nominal terms in the first eight months of 2003 (3,1% higher in constant 1995 prices) while retail sales have grown 10,8% nominally in the year-to-date to August (3,6% in real terms).
Doig notes that in both manufacturing and wholesale sales the most recent month’s performance has been very strong in real terms, reflecting the positive impacts of declining inflation and interest rates as well as the still substantial although lower income-tax relief.
With regard to the latter, Doig foresees very little fiscal relief in the new tax year as a consequence of lower-than budgeted for revenue, which he says will put budgets under pressure in the new year.
“With the costs of production now firmly in negative territory — and this deflationary scenario could exist until the end of the year — the positive effects have started flowing through into the consumer environment.
CPIX could approach 4,5% in the fourth quarter (from 6,1% in the third quarter) and even lower to 3,4% in the first quarter of 2004. This disinflationary environment will thereafter start to dissipate in the latter half of 2004 but CPIX of below 5% does all but appear certain next year,” says Doig.
This scenario could certainly see two further interest rate cuts of 100 basis points each in December and early 2004, he says. In the meantime, a Christmas sales growth forecast of 9% to R50,2-billion takes account of heightened price competition although double-digit growth of 10,5% (R50,9-billion) cannot be ruled out and would certainly gladden retailers’ hearts. — I-Net Bridge