Economics Correspondent

LOW inflation and falling interest rates spurred consumer spending in October, with retail trade sales rising a robust 7,7% year-on-year, according to figures released yesterday by Statistics SA.

However, strong consumer demand as reflected by the retail trade sales figures may persuade the Reserve Bank to act cautiously in reducing interest rates further to prevent overstimulating domestic demand, which could be inflationary, economists warned yesterday.

The rise in real retail trade sales were slightly lower than the previous month's bumper sales growth of 8,2%, but still reflected buoyant consumer demand ahead of the festive season.

Nedcor's chief economist, Dennis Dykes, said there was "reasonably strong anecdotal evidence" that the end-of-year shopping season had been a favourable one for retailers.

This signalled strong growth in retail sales in November and December as well.

Consumer confidence grew in leaps and bounds in the second half of last year as inflation was brought under control and drastic interest rate cuts put more cash in consumers' pockets.

The targeted inflation rate, CPIX (consumer inflation excluding mortgages) slowed to 4,4% year-on-year in October, while the prime overdraft interest rate was brought down to 12% in October, compared with 17% at the beginning of last year.

Real retail sales amounted to R12,8bn in October, while sales for the first 10 months of last year were 4,5% higher than the same period in 2002, according to Stats SA's figures. Sales during the month were marginally lower, falling 0,8% in October on a seasonally adjusted basis.

JP Morgan economist Marisa Fassler said sales of durable and semi-durable goods were "particularly strong", with sales of footwear rising 32,5%, men's clothing increasing 17,9%, textiles climbing 16,9% and audio equipment rising 15,3% (on a year-onyear basis).

"The retail sales data suggest that consumer demand remained strong in October, boosted by falling interest rates. Anecdotal evidence from retailers shows that strong demand carried through into the festive season," said Fassler.

However, evidence of strong consumer demand and a pick up in bank credit to finance consumption expenditure may persuade the Bank to act with more restraint next month when it decides its interest rate stance.

The monetary policy committee warned last month, when it cut rates by a lower-than-expected 0,5 percentage point, that domestic demand for goods and services probably accelerated in the fourth quarter and would eventually put upward pressure on inflation.

Dykes said that a continuing strength in consumer spending that was not matched by growth in productivity might cause the Bank to act with more caution.

Dykes said there were other signs on the inflation front, such as strong credit growth, a slightly weaker rand and the rising global oil price, that would probably persuade the Reserve Bank to cut interest rates by another 0,5 percentage point.

"We expect another (0,5 percentage point cut), then rates will remain pretty flat, with the next move probably upwards," said Dykes.

Jan 15 2004 07:37:34:000AM Nasreen Seria Business Day 1st Edition