South African retail sales continue to slump in November

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By Kevin Lings

Stats SA have released the retail sales data for November 2007. According to this latest survey, retail sales rose by a very modest 0.2%y/y in real terms in November. This compares with a 1.9%y/y in October and 1.7%y/y in September. The market was expecting a decline of 0.4%y/y, but this was a very small sample size and not that useful as a reflection of the consensus. In the three months to November, sales were up only 1.2%y/y in real terms compared with the corresponding period in 2006, and up 5.9%y/y in the first eleven months. The trend is clearly reflecting a sharp slowdown in retail activity. In 2006 as a whole, sales grew by 9.7% in real terms.

This slowdown in consumer activity is especially evident in the durable goods component of consumer activity, including passenger cars, furniture and appliances. Oddly, food sales have also slowed significantly, which could reflect the impact of the current high cost of food (food inflation is up at 13.3%y/y).

The key question now is to what extent retail sales and consumer spending will slow further during 2008. Unfortunately a number of key economic factors will start to impact more fully on consumers.

Interest rates have risen by 400bps since June 2006 and are back at 2003 levels. This is significant because it is the highest interest rate that has been experienced by more than half of SA’s current consumer debt.

While consumers have increased their use of asset based finance, there has been a very noticeably rise in credit card and private label consumer card debt. Consequently, while the amount of outstanding card debt is relatively small, it does have a fairly significant draining effect on monthly cash flow. (Many consumer will probably now look to shift short-term debt into more long-term debt, mainly through their mortgage)

Average debt servicing costs have risen in the past year and are currently around 11%, which is high by historical standards. The cost of servicing debt is back to an eight year high and starting to impact the consumer

Summonses for debt are now clearly trending higher, but off a very low base. In contrast, judgements for debt are still low, but likely to trend higher over the coming 6 months

Insolvencies are still close to an all time low, but are also expected to move higher within the next 6 to 9 months

While the consumer does not appear to be in significant financial distress, the position is expected worsen noticeably over the coming year, especially if there is a further interest rates.

House price growth has slowed and the equity market has weakened recently. This is dampening the wealth effect, which will hurt consumer activity.

Introduction of the National Credit Act (NCA) should continue to slow growth in consumer credit

The combination of the above factors is likely to result in a further slowdown of consumer activity, off a high base, in 2008. The growth in consumer credit has already started to soften (also off a very high base); a good example is the fact that consumer credit card debt was growing at around 45% y/y in the middle of 2007, but has now slowed to less than 30% y/y. There is little doubt that the higher debt servicing costs are eating into disposable income, while the higher inflation rate is eroding real income growth.

CPIX inflation remains well above the target and is set to move above 8% over the next few months. However, a further interest rate hike by the Reserve Bank at the end of January could substantially weaken the consumer, and may represent a tipping point.

Source: Kevin Lings, Stanlib, January 17, 2008.

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Read more on Retail Sales, Food & Beverage at Wikinvest
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