Inflation and retail sales are a boost for growth outlook

Posted On Thursday, 18 April 2013 11:58 Published by eProp@News
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RETAIL sales accelerated much more than expected in February, suggesting that the expected slowdown in consumer spending may not be as severe as feared and lifting gloom over the growth outlook.

Although extremely volatile, retail sales are a key gauge of consumer spending patterns and fall into a sector that contributes about 14% to the total value added to domestic growth.

Absa Capital economist Peter Worthington said the latest Statistics South Africa data were likely to "cheer" the Reserve Bank, which on Tuesday had raised concerns over inflation and unemployment.

Consumer spending is the economy’s main engine, accounting for about 60% of gross domestic product.

Inflation as measured by the consumer price index (CPI) also surprised last month, according to figures on Wednesday, coming in weaker than expected and supporting forecasts for interest rates to stay unchanged this year.

Retail sales rose by 3.8% in February compared to a year earlier, far above the 1.6% BDlive consensus forecast, while inflation remained unchanged at 5.9% year on year last month. Higher education and transport costs kept inflation under pressure during the month.

Investec chief economist Annabel Bishop believed both the year-on-year and three-month retail sales data showed "an incipient change in direction".

First National Bank household and consumer sector strategist John Loos, however, did not believe the 3.8% growth in retail sales was sustainable given many downward pressures on household disposable income growth, including increases in water and electricity tariffs and property taxes.

Ms Bishop suggested more headwinds for retail sales in the first half of this year. "Retail sales growth is likely to remain below 5% on average in the first half of 2013 as consumers continue to deleverage. A pick-up in the global economy in the second half of 2013 should lift incomes."

Higher prices for essentials such as transport and electricity have put added strain on the purchasing power of households‚ particularly among the lower income groups.

The latest higher than expected retail sales come just days after other key indicators of consumer confidence pointed to a tough time ahead for the retail sector.

Consumer confidence deteriorated to nine-year lows in the first quarter, according to a Bureau for Economic Research (BER) consumer confidence index, while the latest Ernst & Young-BER survey provided evidence of a further slowdown in retail sales volumes in the first quarter of the year.

While the Reserve Bank’s monetary policy committee will take the retail sales figures into consideration when it holds its meeting next month, it is likely to be more relieved about inflation coming in better than expected and remaining within the target band last month.

It will be encouraged in particular by the slight moderation in core inflation, which is CPI minus food, petrol and energy. Core inflation moderated to 5.1% year on year last month, from 5.3%.

Citadel economist Dave Mohr said it was optimistic that inflation would only temporarily breach the upper end of the 3%-6% target in coming months.

"The recent fall in commodity prices will help a lot," he said.

Source: BD

Last modified on Wednesday, 22 May 2013 09:57

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