May retail sales climb, jury out on rates

South African retail sales rose more than expected in May, growing for the fifth month in a row ahead of the soccer World Cup, but leaving analysts divided on next week’s interest rate decision.

Consumer spending has generally lagged the broader economic recovery as households’ indebtedness remains close to record highs and after the recession last year caused the loss of a million jobs.

But Statistics South Africa said retail sales rose 4,6% in May year-on-year, accelerating from downwardly revised 2,9% growth in April and outpacing forecasts for a 3,7% rise.

The central bank will decide on interest rates on July 22, some two weeks after cautious comments on the economic outlook from governor Gill Marcus.

“The current low interest rate environment and the slowly improving levels of consumer confidence ... [are] having a positive influence on the consumption recovery,” said Jeffrey Schultz, macro strategist at Absa Capital.

But Schultz said the number was not strong enough to change his view that interest rates would be unchanged next week.

Bonds weakened slightly after the retail sales data, having gained sharply in recent weeks on slightly higher expectations of a rate cut next week.

The central bank cut the repo rate by 550 basis points to 6,5% from December 2008 to March 2010 to help stimulate demand.

Some government bond and money market traders have priced in more than a 50/50 chance for a rate cut after Marcus said the economic recovery after last year’s recession remained fragile in view of the debt woes in Europe and weak demand.

World Cup boost?
Analysts expect retail sales growth to be weak for the year and attributed the strong annual rise in May to buying ahead of the month-long soccer World Cup that ended on Sunday.

“We expect the recovery in retail sales to continue for the remainder of the year but at a mild pace as consumers remain burdened by debt and increasing monthly expenses,” said Investec in a note.

Investec said the data did not change its view that an interest rate cut is likely next week after a slew of data showing the recovery might be losing momentum.

Razia Khan, head of Africa research at Standard Chartered, also expects a rate cut. Khan said although consumption was recovering, external headwinds to growth and private sector employment creation persisted.

“Consumers are still deleveraging, and outside of the World Cup bounce, there is nothing to suggest retail sales will soar.”

“There is still room for further stimulus, for further rate easing to help South Africa’s highly indebted consumers, and the inflation outlook is sufficiently benign to support this,” Khan said.

“The SARB should cut interest rates 50 basis points next week.”—Reuters


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