Mariam Isa
12 November 2007
Johannesburg — RETAIL sales figures will provide insight this week into whether higher interest rates have curbed consumer spending, the main engine of economic growth.
But they are unlikely to have much effect on the Reserve Bank's monetary policy decision next month, given its focus on the deteriorating inflation outlook.
A Bloomberg poll predicts that annual growth in retail sales, which make up more than 14% of the economy, slowed to 3,5% in September from 6,9% in August.
But the forecasts range from 3,1% to 7,9%, highlighting the volatility of the data, which is due on Wednesday.
Nevertheless, the data are likely to back the view that six interest rate hikes since June last year are taking a toll on retail sales, the economy's third-biggest sector.
"We expect average growth of around 5% in real retail sales over the next few months," Standard Bank said in a research note. "This may point to a solid, rather than a bumper, festive season".
Seasonally adjusted growth in retail sales appears to have peaked at an annual rate of 13,5% in September this year, according to monthly official data
Other figures from Statistics SA show that retail trade, which includes hotels and restaurants, slowed for four quarters in a row.
That suggests a cumulative 3,5 percentage point rise in lending rates is starting to bite hard enough to slow the economy and ease pressure on rising inflation.
But in a monetary policy review last week, the Bank played down the trend, saying there were "signs of moderation in consumption expenditure".
"The outlook for monetary policy will depend to a significant degree on whether these signs of moderation are sustained and sufficient to bring about the desired inflation outcome."
Household spending is the indicator the Bank considers the most reliable consumption gauge. Its September quarterly bulletin showed that its growth rate slowed to an annualised 5,5% in the second quarter of this year from 7,5% in the first quarter.
Unfortunately, figures for the third quarter will be released only in the December quarterly bulletin, a day after the Bank makes its next decision on interest rates.
"Retail sales data for September will probably confirm activity in the sector is growing at a more moderate pace," Citigroup economist Jean-Francois Mercier said.
Growth in disposable income and employment, along with higher wage settlements, have so far helped mute the impact of rising interest rates on consumers.
But household debt has risen to a record 76,5% of disposable income, and debt service costs are estimated at 10% of disposable income, an eight-year peak.
Rising inflation and a slowdown in house prices are also likely to have helped rein in consumer spending.
Some analysts say there are rising signs of debt distress in the economy. Credit card debt in arrears for three months or more rose to 6,3% of the total from 5,1% before interest rates started rising last year, Standard Bank says.
During the same period the proportion of mortgages in arrears for three months and more rose from 2,1% of the total to 2,8% in August.
But credit growth remains too high for comfort, rising 22,5% in the year to September versus 23,2% in August.
Part of the reason for the trend could be that with the increase in employment in recent years, many more South Africans are eligible for credit.
Consumer confidence has defied the odds, dipping slightly in the third quarter of this year after scaling a record peak in the first. But retail confidence is less buoyant. An index produced by the Bureau for Economic Research showed it fell sharply to 84 in the third quarter after a record high of 91 in the first and second quarters.
Demand for durable goods such as furniture and household goods has fallen, with the value of sales in August dipping to their lowest level since early last year.
That category is the most sensitive to changes in interest rates.
Figures from the Bank confirm the trend, showing that spending on durable goods fell at an annualised pace of 10% in the second quarter of this year.
Spending on motor vehicles has been particularly hard hit, with sales declining for six months in a row, compared with the same month last year. Tighter credit rules introduced in June are also likely to have discouraged consumer spending, but the effect is difficult to quantify.
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