Investment Postcards from Cape Town

By Kevin Lings

In March, new passenger vehicle sales (as reported by NAAMSA) declined by a very significant 23.1% y/y, compared with a decline of 14.7% y/y in February 2008. This is the worst annual decline since 1999, and a concern given the already high interest rates and cash-flow squeeze most consumers are currently facing. Given how erratic the monthly car sales data are, it is obviously important to analyse the car sales data on a trend basis. Overall, passenger vehicles sales have clearly weakened very significantly in the past year, albeit off an extremely high base. In fact, as recently as July 2006 passenger vehicle sales were growing by 20% y/y. In 2007, passenger car sales were down 9.9% compared with 2006. For 2006 as a whole passenger vehicle sales grew by 13.7% following growth of 25.9% in 2005.

As mentioned last month, this slowdown in car sales reflects the combination of a high base of sales established in the preceding 3 years, successive increases in domestic interest rates, the introduction of the National Credit Act, high debt levels among consumers, and elevated debt-servicing costs. Passenger car sales are expected to remain in a severe downward trend during most of 2008 as interest rates continue to dampen activity.

In terms of commercial vehicle sales, there is still a clear divergence in sales performance between light commercial vehicles (down by a massive 10.7% y/y in March) and heavier commercial vehicles, which continued to improve. The divergence in growth between passenger car sales/light commercial vehicles and medium and heavy commercial vehicles probably reflects the relative buoyancy in infrastructure development, including the transport of various raw materials, earth-moving equipment and machinery and equipment. This pattern of performance is likely to continue during 2008.

It is clear that the consumer is under severe pressure. This is reflected in weak retail spending, a sharp slowdown in disposable income growth, increased debt-servicing costs, a massive decline in passenger car sales, a pick-up in non-discretionary consumer costs (e.g. petrol), a moderation in housing activity as well as house prices, and an increase in summonses issued for debt. This is not the ideal environment for a further rate hike. Hopefully the Reserve Bank will be willing to leave interest rates on hold when it meets next week.

Source: Kevin Lings, Stanlib, April 3, 2008.

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