After the more moderate 8,7% increase in retail sales in August from the revised 9,6% in July, any further cooling in retail sales growth in September will be good news on the interest rate front, say analysts.
“While rates are highly likely to be raised by a further 50 basis points in December, a clear slowing in consumer demand would not only signal to the Reserve Bank that tighter monetary policy is serving its intended purposes, but would also significantly decrease the chances of further rate hikes in 2007,” say analysts RLJP.
“Higher interest rates will undoubtedly be affecting household demand at the margin, particularly poorer households, while higher interest payments on debt and increasing inflation will reduce aggregate discretionary income. These effects will begin to be felt over the next number of months as private consumption expenditure growth moderates into 2007,” they add.
Nedbank researchers Dennis Dykes and Magan Mistry say that growth in retail sales is expected to ease off a high base as consumers begin to react to rising interest rates.
“While most retailers should still enjoy strong sales over the festive season, a softer trend is expected to emerge in early 2007,” say Mistry and Dykes.
“Despite slightly slower growth, retail sales remain robust and the MPC is likely to wait for more compelling evidence of slower growth in domestic spending. The risks to the inflation outlook still remain on the upside, especially given mounting pressures at the producer level, a volatile rand and still strong credit demand. We therefore expect another 50 basis point hike in rates at the December MPC meeting, taking prime to a peak of 12,5% by year-end,” say the Nedbank economists.
Total retail trade sales amounted to R33,9-billion in August according to Statistics South Africa. Real sales growth in August was 8.7% y/y, down from a revised 9,6% y/y in July. Real growth for the year to date is 9,4%.
“Signs that sales growth would fall slightly but remain strong in August were evident from a number of leading indicators. Private sector credit demand growth continued to increase to record levels in August, while the trade account continued to deteriorate rapidly, although not quite as severely as in July,” say RLJP.
They add that despite strong credit demand growth however, instalment sales credit demand actually fell slightly in August. Further, August saw a significant cooling in passenger vehicle sales growth, which dipped even further in September.
September would have been the first full month since August’s rate hike that consumers faced interest rates a full 1% higher than a year earlier. Although many analysts believe that the recent series of rate hikes have not curbed consumer demand adequately yet, RLJP say it is advisable not to be too pessimistic regarding the efficacy of the hikes.
“In the June-August quarter, average real retail sales growth was 9%, compared with 10,3% y/y in the previous three months, before rates had been raised,” they point out.
They add that vehicle sales growth fell again considerably in September, while September’s trade deficit contracted sharply.
“Further, despite overall credit demand growth remaining incredibly strong, September’s instalment sales credit demand fell for the second month running,” conclude RLJP.
Absa’s economic researchers say that while sales at constant prices may have slowed on an annual basis from July, the fact that in the eight months to August sales rose at its highest rate since 2000, suggests that consumers were still fairly relaxed about the interest rate hikes that had occurred in June and August. They emphasise, however, that they do anticipate slower retail sales growth early next year due to the lag effect of monetary policy.
“With interest rates expected to rise further [we anticipate another 50- basis point hike in December and possibly two more during 2007], consumers’ financial positions are likely to worsen. The weaker rand is also likely to lead to price increases, depleting consumers’ disposable incomes,” say the Absa economists.
“As a result of the lag effect of monetary policy, the effects on spending will only become visible early next year and as such we anticipate slower retail sales growth early next year. The festive season is generally a high spending period, which should support sales in the next two months,” conclude the Absa researchers. – I-Net Bridge