Sentiment among South African retailers has plunged to a 15-year low in a high interest rate environment, underscored by a pull-back in credit extensions.

The situation is unlikely to improve in the latter part of 2016, as the outlook for the domestic economy remains bleak.

The latest EY/Bureau of Economic Research (BER) Retail survey shows that business confidence among retailers fell to its lowest level in 15 years during the second quarter of 2016. The percentage of retailers that reported satisfaction with prevailing business conditions fell to 26%, down from 44% in the first quarter. This is the lowest level recorded since 2001. In addition, this is even lower than levels recorded during the global financial crisis of 2009.

Derek Engelbrecht, EY consumer products and retail sector head, said that sustained weak volume growth prevented retailers from hiking selling prices in line with earlier expectations. "The subsequent erosion of profit margins, coupled with the sombre outlook for the economy and retailers’ expectations that sales growth will wane further in the third quarter, in all likelihood weighed heavily on retailer confidence."

The survey results also reveal that durable goods — such as furniture, hardware and household appliances — experienced a steep decline; while semidurable goods including footwear and clothing, took a knock because of tighter credit conditions and slowing disposable income growth.

Sales of nondurable goods came under pressure because of soaring food prices as the rand weakened against major currencies. Investec economist Kamilla Kaplan said that, according to GDP statistics published by Statistics SA, retail fell under the "trade, catering and accommodation sector", which consists of nearly 14% of GDP.

As such, the sector had a meaningful effect on SA’s growth outcomes, Kaplan said.

"The performance of the retail sector is also reliant on household consumption expenditure, which in turn makes up about 60% of GDP. Changes to household consumption expenditure have significant repercussions for GDP. In the first quarter, household consumption expenditure contracted and, indeed, we saw growth in the trade sector slow in the same quarter."

Kaplan said the decline in household consumption expenditure reflected the effects of higher rates and living costs; tighter credit criteria applied to households; depressed consumer confidence; high unemployment; high levels of indebtedness; and a slowdown in real disposable income growth.

According to Statistics SA data, growth in retail sales slowed further from 2.9% year on year in March, to 1.5% year on year in April, the slowest pace of growth in almost two years.

ETM Analytics economists said the dwindling prospects in the retail sector, coupled with the lack of growth in other industries, could stay the Reserve Bank’s hand in deciding whether to tighten monetary policy further. The Bank’s next monetary policy meeting is scheduled for July 21.

"Although it is not an environment comparable to the recession of 2009, it is weak enough to encourage the Bank to remain extremely cautious."