Consumers opt for bare necessities as SA heads for recession
Consumers may shift their spending away from luxuries and allocate it towards essentials as economic conditions worsen, says an analyst.
Data from Statistics South Africa (Stats SA) released on Wednesday indicate that the annual rate of retail sales declined by 1.7% in February 2017. The main contributors to the annual decline include reduced sales in textiles, clothing, footware and leather goods by 7.6%.
There was also a 6.5% decline in household furniture, appliances and equipment. Hardware, paint and glass sales declined 5.5%.
FNB economist Jason Muscat said this might signal sales of durable and semi-durable goods will shrink in the first quarter of the year. He added consumers are more likely to allocate disposable income to “essential” household items.
“With the hope of rate cuts having all but evaporated since the downgrade, we expect another tough year for consumers despite a moderating inflation profile,” he said. However this may translate into consumers taking on less debt. “We anticipate the shock to confidence, and ultimately consumption, will lead to further household deleveraging.”
Muscat added that the declining rate also supports FNB’s view that the country is entering a technical recession. He explained that the sales growth of 0.8% since January 2017, an improvement from the 1.2% contraction from the previous month, was overshadowed by the quarterly contraction of 1.3%.
Stanlib chief economist Kevin Lings however said the 1.3% quarterly decline was worrying. “[This] is the worst quarterly performance in retail sales since the global financial market crisis.”
Lings explained that the decline in the quarter may be exaggerated due to the “Black Friday” sales in November 2016, which was included in the previous quarter’s data. In November 2016, retails sales jumped 3%, mainly due to “Black Friday”.
He also pointed out that the declining retail and manufacturing data shows that South Africa is slipping into a technical recession. The mining and agriculture sector should perform better for the country to avoid a recession, he explained.
Retail sales aren’t expected to improve for the rest of the year with Stanlib projecting a decline of 0.5% in 2017. Consumers will be facing the impact of tax hikes, the delayed impact of interest rate hikes, a higher fuel price and weak confidence levels.
Lings said the credit downgrades by Standard & Poor’s (S&P) and Fitch will see consumer confidence levels weaken further.
“Consumer confidence is depressed and likely to worsen in the months ahead given the increase in political and economic uncertainty,” he said.
Possible job shedding by the private sector would further add to reduced retail spending, pushing the sector into its own recession. This would impact tax revenue estimates, making room for fiscal slippage and further ratings downgrades, said Lings.
“The South African economy is in a precarious position and urgently needs a boost in both business and consumer confidence,” he said.
South Africa's yearly retail sales