CONSUMER spending continued to climb in July, adding to the case for monetary policy tightening when the Reserve Bank’s monetary policy committee concludes its meeting today. Data released yesterday by Statistics SA showed that retail sales, the main indicator of consumer demand, climbed 9,8% year on year in July, up from June’s revised 8,7%. In the three months to July, retail sales were up 9,5% but higher interest rates were expected to curb spending in coming months, analysts said yesterday.

“Although the latest figures suggest that consumers have ignored the warnings sent to them by the interest rate hike in June, expectations and behaviour generally take time to adjust,” said Nedbank economist Nicky Weimar. Annual growth rates in retail sales are expected to ease more significantly, off a high base, from September onwards. Weimar said this trend was likely to intensify through next year. The monetary policy committee has already hiked its repo rate by 100 basis points to 8% this year, and is expected to raise rates by 50 basis points when it concludes its two-day meeting today.

“The latest retail sales figures, providing further confirmation that consumer spending and credit demand remained exceptionally resilient in the early part of the third quarter, are unlikely to surprise the Bank,” said Weimar. The Bureau for Economic Research’s (BER’s) retail sales survey for the third quarter of this year, released yesterday, confirmed that the retail sales bonanza continued during the quarter, supported by low interest rates, robust consumer income, economic growth, a strong rand, the roll out of social grants, improving employment levels and high consumer confidence.  “Retail sales have been booming since Christmas,” said the BER’s Linette Ellis.

One possible explanation for the stronger-than-expected growth in durable goods sales could be that some consumers are engaging in pre-emptive buying of imported durable goods (such as new vehicles and electronic goods) in anticipation of price increases after the recent depreciation of the rand. “The June and August interest rate hikes, along with expectations of further increases, should put the lid on credit growth, while the recent depreciation in the rand will make imported goods more expensive,” Ellis said. Similarly, high petrol and food price inflation will reduce the purchasing power of households and constrain retail sales growth. At 39%, household consumption expenditure remained robust in the second quarter of this year, with demand buoyed by the favourable economic environment of strong growth, relatively low interest rates and a benign inflation environment. Manufacturing production slowed to 4,2% year on year in August, down from a revised 5,9% in July. Month on month, production was down 0,7%.

The weakening in the rand in recent months is expected to keep activity in the sector relatively strong in the short term. “While the decline in quart-erly output by the division for food and beverages may be an early indication of an imminent slow-down in other interest-rate- sensitive divisions, we remain confident that the overall manufacturing output performance should remain fairly solid over the next few months,” said Vunani Securities chief economist Johan Rossouw. In the three months to August, the sector for food and beverages was down 0,7%.  “The detrimental impact on manufacturing output of an interest-rate-related deceleration in consumer demand growth should partially be offset by additional demand flowing from government’s fixed investment spending,” Rossouw said. He said a weaker rand should soften the interest rate blow by bolstering net exports. 

The rand was quoted at R7,71 to the US dollar.