By Claire Bisseker 

Retailers are reporting record results and believe the spending boom will continue      
  
Retail spending is rocketing but, unlike previous economic cycles when demand was choked off by interest rate hikes, there is little prospect of consumer spending going bust this time. 

Economists are increasingly of the view that SA has begun to enter a period of structurally lower interest rates and inflation. Some say the severe boom-and-bust cycles of the 1970s and 1980s may be a thing of the past. 

This doesn't mean there won't be short-term cycles pushing up inflation and interest rates or weakening the rand, but rather that cyclical turns are likely to become more muted. 

This is great news for the retail sector, which is enjoying its biggest boom in more than a decade.  "I think we'll see an extended upward cycle," says JD Group chairman David Sussman. "The only thing that could affect it is if the strong rand has an impact on jobs, but we have not seen that impact on our debtors book so far. In fact, it has never looked this good." 

The consumer spending spree is attributed to big budgetary tax cuts in 2002 and 2003, last year's steep rate cuts, the strong rand making imported goods cheaper ( JD Group has experienced a 25% cut in the price of products such as TVs, videos and hi-fis ), and rising house prices making owners spend more because they feel wealthier.  In the first half of 2004, sales of new vehicles were up 19,6% year-on-year and the National Association of Automobile Manufacturers of SA is confident that sales this year will exceed 410 000 units - the highest since 1983 . 

The clothing industry has also had a good year; the share prices of Foschini and Edcon are approaching their previous all-time highs.  Last week, Edcon's executive manager of investor relations, Tessa Christelis, told journalists that neither a 200 basis point hike in the repo rate nor the rand weakening to R8/US$ would affect the clothing retailer's growth. 

"The economy, and consequently consumer demand, is doing far better than reflected in official statistics," she said. "Our actual sales [which rose by 25% in the first 14 weeks of the financial year compared to the same period last year] have exceeded internal forecasts by about 10 percentage points." 

Revised Stats SA figures confirm that consumer demand was exceptionally buoyant in the first half of 2004. Real growth in retail sales shot up 10,3% in May year-on-year against an upwardly revised 8,7% year-on-year gain in April.  The burning question is how long the boom can last.  Last year, the Reserve Bank cut rates by 550 basis points. If the traditional economic cycle were to repeat itself, rates should be hiked by a similar amount - but this is not on the cards. At worst, economists are predicting an increase of one or two percentage points in the repo rate in the first half of next year, which would dampen demand, but not kill it. 

What is different this time? 

"The economic and political conditions that fed the boom-and-bust scenarios of the past 35 years have been worked out, leaving a solid foundation for a more stable economic environment," says Old Mutual Asset Managers (OMAM) senior portfolio manager Alwyn van der Merwe.  He goes further than most, arguing that the current environment shows similarities with the 1960s, when cyclical swings were a lot more gentle than in the boom and bust era (see graph). Growth averaged 5,5%/year during the 1960s, inflation 2,5%/year and real interest rates a low 4%/year. 

The subsequent boom-and-bust cycles were caused by SA's balance of payments constraint. Essentially, an economic downturn would prompt the Bank to cut rates aggressively. This would cause consumer demand to boom, which would fuel imports, resulting in a large current-account deficit.  Large current-account deficits caused the rand to weaken sharply, inflation to rise and the Bank to retaliate by hiking rates, thus throttling demand. 

This time, says Van der Merwe, it's not just the happy coincidence of a synchronised global upswing that has pushed up demand and prices of commodities, shielding SA's balance of payments and supporting the rand. More importantly, the deficit has been financed by significant capital inflows, reflecting a positive shift in sentiment about SA which has supported the rand . 

Nedbank economist Dennis Dykes agrees that SA is entering a period of lower interest rates and inflation, and that the peaks and troughs of the cycle should be less severe. He sees consumer spending growing by 4% this year, followed by 3,5% next year, and then probably picking up again in 2006 and 2007 on the back of rising employment. 

It's a heartening picture. But Dykes cautions that since SA is a small, exposed economy in a volatile world, it remains vulnerable to external shocks and the current environment provides no carte blanche for SA to run up significant debt.