October retail sales shrink, backs rate cut

South Africa’s retail sales fell for the sixth month in a row in October, official data showed on Wednesday, adding weight to the argument that the central bank should cut rates on Thursday.

The central bank’s Monetary Policy Committee (MPC) started its meeting on Wednesday, and Reserve Bank Governor Tito Mboweni is due to announce its verdict from about 1pm GMT on Thursday.

Consumer spending has been sluggish on the back of higher interest rates, which have gone up by five percentage points since June 2006, as the central bank seeks to arrest inflation.

Statistics South Africa said retail sales fell by 2,3% year-on-year in October, from a revised 5,6% in September, while in the three months to end October, this gauge of consumer spending fell by 4,5%.

Fourteen out of 21 economists polled by Reuters last week said they expected the MPC to cut the repo rate by 50 basis points to 11,5%.

“It’s still a recession environment for the consumer,” said Elize Kruger, economist at Thebe Securities of the retail sales data.

“In this regard, I think it adds to the debate at the Monetary Policy Committee that consumers are under strain, and adds to the justification for a 50 basis point [interest-rate] cut,” she said.

The central bank said in its quarterly bulletin on Tuesday household spending fell 0,8% in the third quarter for the first time in 10 years, and economists say consumers will likely remain under pressure well into the next year.

Consumers hard hit
Hard-hit consumers have been turning to discount stores like Massmart, while higher-end retailer Woolworths has been forced to cut prices to prop up sales that have dropped below inflation.

Most South African retailers have predicted lacklustre trading will drag into next year.

Underlining the extent of consumer pain in Africa’s biggest economy, South Africa’s big banks have all reported rising bad debts at their retail units.

FirstRand last week flagged a bigger than expected fall in full-year profit as consumers battle to keep up with mortgage and car payments.

A separate survey by the South African Chamber of Commerce and Industry on Wednesday showed trade conditions fell to their lowest level of 38 since the index started in August 2000.

With such a bleak environment and falling consumer spending that threatens economic growth, which was at a decade low of 0,2% in the third quarter, most economists say the central bank might not have a choice but to cut rates.

But, it will not be a simple decision.

“A further increase in inflation expectations ... could for example prompt the Bank to err on the side of caution,” said Arthur Kamp, economist at Sanlam Investment Management.

“On balance however, recent economic developments, including interest rate cuts from central banks around the world have presented an opportunity to bring South African interest rate cuts forward.”

Mboweni said last week the MPC must take into account the changed global economic environment but policymakers should also not take their eyes off “the inflation ball”.
- Reuters

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