Mariam Isa
15 October 2007
Johannesburg — FIGURES for retail sales growth in August - due this week - may give further evidence that consumer spending is subsiding, which would back the case for keeping interest rates steady.
Consumer demand is SA's main growth engine, and the Reserve Bank's decision to lift its key repo rate to 10,5% last week will take more steam out of spending and borrowing.
"Given the recent weakening in domestic demand conditions, the Bank has likely finished its monetary tightening cycle," Moody's Economy.com said in a research note.
Consensus forecasts predict that annual growth in retail sales, the economy's third-biggest sector, was little changed in August, after rising 4,9% in July -- a two-year low. The figures from Stats SA are due on Wednesday.
Consumers have started to feel the pinch of higher interest rates, which have climbed 3,5 percentage points since June last year as the Bank tried to quash rising inflation.
They have also been affected by tougher credit rules introduced in June this year, although this has not yet had much effect on lending to the private sector.
It normally takes between one and two years for changes in interest rates to make themselves fully felt in the economy.
But research from Standard Bank suggests that household spending responds with a shorter lag, of six to 12 months.
"This means that the effect of higher interest rates on retail sales growth, which has become more entrenched, will be extended well into next year," it said. "(Last week's) interest rate hike will in due course further tighten the screws."
Standard Bank expects retail sales to continue to grow about 5% over the next few months.
The retail sector, which accounts for about 14% of the economy, has slowed for four quarters in a row. Official figures also show growth in household spending dipped to an annualised pace of 5,5% in the second quarter, a four-year low.
"We expect ... retail sales to continue weakening during the rest of the year, after which we should see some pickup from the second quarter of 2008," Efficient Research said.
Household debt has climbed steadily for the past few years, scaling a new peak of 76,5% of disposable income in the second quarter of this year. But debt service costs were steady at 9,5%.
Analysts believe that strong economic growth -- which has helped fuel brisk increases in disposable income and job creation -- is still likely to sustain retail sales, albeit at a slower pace.
"Retail sales have shifted to a lower growth path than a few quarters ago ... and this slowdown will probably be sustained," said Citigroup analyst Jean-Francois Mercier. But he also said: "Industry surveys and anecdotal evidence suggested that in nominal terms, sales growth was not that different in August from July."
Much of the slowdown seen so far in the sector has been caused by falls in spending on durable goods such as furniture and household appliances, which are more sensitive to interest rates.
But vehicle sales have been hit the hardest, plunging 13% last month compared with the year-earlier month. The annual change has fallen for six months running, industry figures show.
Other figures due on Wednesday will show what happened to the building industry in August. During the past year, there has been a sharp slowdown in the residential market, although the commercial sector has so far picked up much of the slack.
Citigroup's Mercier expects annual growth in residential building plans passed in August to have slumped to 2,6% from 3,4% in July.
But he forecasts nonresidential plans rising 2,2% in August, from 1,7%. Nonresidential building plans will remain supported by a dramatic pickup in both private and public sector investment, spurred in part by an official R416bn infrastructure spending drive.
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