Amid all the hype surrounding the retail boom, the question arises as to whether rising credit extension in the run-up to the Christmas spending season is cause for concern, or whether it is simply indicative of the fact that consumers have regained buying power from the sellers.
According to Credit Guarantee’s Senior Economist Luke Doig, some warning signs have certainly begun to emerge. Even with prime overdraft rates at levels last seen in early 1981, household debt to disposable income has risen from 50.7% in the fourth quarter of 2002 to 54.8% in the second quarter of 2004. Critically, company and CC liquidations in the third quarter of 2004 rose 22.4% over the previous quarter.
"Money supply growth is edging towards 15% and while concerns are also being raised about credit extension augmentation, we need to question whether this is pragmatic in the face of benign inflationary pressures," Doig continues.
"The positives are that consumers are benefiting from year-to-date headline CPI and CPIX of 0.8% and 4.3% respectively, which have boosted spending power enormously. This has been aided by imported competition arising from the strong Rand."
"Furthermore, employee compensation as a percentage of GDP, which bottomed in 2002, rose 1% in the third quarter of 2004. This translates into an additional R12.5bn in spending power for private households," says Doig.
"Manufacturers and wholesalers have also benefited from the resulting increase in consumer demand and production capacity utilization within the economy, which exceeded 84% in May and possibly increased further after that."
The incidence of cash sales has been increasing over the past few years, improving from 78% in 2002 to 78.2% last year. There is however a tendency for more credit sales over Christmas. Cash sales were only 76,5% in December 2003 and 75,6% in December 2002.
"Anecdotal evidence currently suggests a robust Christmas trading season with retailers going all out to procure sufficient inventories. This alone should be cause for some concern and we would caution against a credit splurge by consumers," says Doig. "Rather repay debt at the current low interest rates or add to your savings."
"Given that retail sales in the first eight months of this year are 12.8% up in current prices and 9.5% higher in real terms, we foresee Xmas sales improving 15% in current terms to R67.5bn. This means an additional R8.8bn in spending over last year’s levels and represents real growth of around 11%," says Doig.
Publisher: Cape Business News
Source: Cape Business News
