Stanlib chief economist Kevin Lings discusses March retail sales which, while better, weren’t able to counter February’s sharp decline

BUSINESS DAY TV: Retail sales staged a minor recovery in March rising by 0.8% from a year earlier, following February’s 1.6% decline. Month on month they rose 0.3% from an increase of close to 1% in February.

But before you crack open the champagne, the longer-term trend isn’t encouraging at all. For the first three months of the year, sales are down by 1.1%, which Stanlib chief economist Kevin Lings says is the worst quarterly performance since the global financial crisis. He joins us now.

Kevin, so the worst since the financial crisis, but people have been talking about a recession in this sector. We’re not there yet though are we?

KEVIN LINGS: No, we’re not quite there yet. Obviously the quarter was a decline and that’s fairly significant. But if you look at the fourth quarter last year, we had positive growth, mostly due to the Black Friday sales in November, which I thought were spectacular at the time. So they tended to boost the November sales, boost the fourth-quarter sales, so when you look quarter on quarter we were off a relatively high base and so we had a decline.

If we follow this up with another decline in retail during the second quarter of the year, then obviously the consumer is effectively moving into a recession and that would be a very bad signal, given that retail has been the backbone of the South African economy for some time. It’s kind of the sector we’ve always relied on to at least give us positive growth while something like manufacturing and mining are a lot more volatile. So this quarter, I think, is concerning. Obviously the month’s slightly better, but again, I wouldn’t read into the month’s improvement in March to say, oh we’re now going to see an acceleration. If I look at the factors impacting the consumer, they’re probably worsening right now.

BDTV: So let’s get into the detail there: what are you anticipating moving forward because, of course, among the factors to take into consideration is that we’ve got inflation on the one hand having slowed in recent months, and that’s easing some of the downward pressure, but on the other hand you’ve got stagnant growth, you’ve got interest rates moving higher, banks a lot more circumspect when it comes to their lending and granting of credit — so you’ve got this pressure point simultaneously pulling in the other direction too.

KL: That’s right. I would say the big factors that you’ve got are tax rates went up in February and we’re obviously only starting to now see the effect of that because it takes time for the tax rates to have some sort of effect for people to notice that they’ve got less money. So I think you’ll see that, month by month, starting to hurt. In addition, if we look at consumer confidence I would say that it’s especially weaker right now, and we know that it’s impacting some of the large ticket items, things like motor vehicle sales. I would say the motor industry is essentially in recession.

If you look at furniture sales, essentially in recession and there’s a likelihood that the confidence remains weak and that starts to eat into other areas of consumer activity. And then on top of that you’ve got the fact that interest rates ... from their low, yes it’s not dramatic but they’ve gone up 200 basis points and over time that does ultimately hurt the consumer.

So you’ve got a number of factors weighing on consumer activity, consumer sentiment. Yes, you’ve got inflation moving slowly back inside the target, and so as the year unfolds, that should provide some relief. But I don’t think it’s enough relief to give the consumer an uplift overall. So overall the consumer is under very significant pressure.

BDTV: The rand appears to be a bit of a wild card at the moment. We have had the Reserve Bank governor Lesetja Kganyago saying that we shouldn’t be expecting rate cuts. But given the current circumstances if the rand continues to hold just above R13 to the dollar, it does provide some scope for him to cut rates going forward.

KL: I believe that’s right, and there is probably a window of opportunity opening for the Reserve Bank to cut rates. Obviously, if you go back to the early part of the year we were actually on the show talking about the prospect of an interest rate cut because it seemed possible. That was before the credit ratings downgrade and the Cabinet reshuffle.

Then we had the downgrade and the feeling then was no, interest rate cuts have gone away because of the uncertainty of what that might mean for currency flows, and we may need to keep interest rates relatively high to attract foreign investment. As it’s turned out, we are attracting a reasonable amount of foreign inflows. As you say, the currency has held on and for some people that’s surprising, and inflation is going to move back, in my mind, below 5% during the course of this year.

So let’s say you’ve got a scenario where the currency is still R13 ... R13.50-odd. Let’s say that inflation is printing 4.6% to 4.7%; the economy is very weak and the Reserve Bank could, if it wanted to, look to cut interest rates once or twice, 25 basis points, and that would then again provide some relief for the consumer. But we’ve got to put it into context. It’s not as if the consumer is going to rush out and now take on a whole lot of credit and boost spending. It would probably be modest relief at best.

BDTV: Talking about putting things in context, let’s put that rand strength, relative strength that we’re seeing into context as well, because a lot of that is based on dollar weakness as opposed to our own local fundamentals that are holding support. And that, one assumes, brings a whole lot of risk into the equation that the monetary policy committee is going to have to take into consideration.

KL: I think that’s very much the case. Obviously, the dollar has really been under quite significant pressure in the last couple of days and it’s possible that it remains a little bit more under pressure, but on a trade-weighted basis the rand hasn’t performed quite as well, and obviously the euro ... Europe is now pretty much flavour of the month. The European data is considerably better and you’re seeing money going back into Europe with the euro doing quite well. But the Reserve Bank would have to weigh up all of these factors and one of the other factors I believe they’ve got to take into account is we still haven’t had the Moody’s credit rating announcement, and obviously that could create some uncertainty in the short term.

And then remember that Standard & Poor’s has us on a negative watch. It’s not as if we are assured that we’re not going to get another credit rating downgrade, and so the Reserve Bank will be mindful that if they do start to cut rates and at that point we find that there’s a risk-off trade against emerging markets and SA’s credit rating looks even more vulnerable, then they’re going to regret having cut interest rates. So there is an option, there is a window but the Reserve Bank ultimately will be quite cautious in moving on rates. So our view is simply, rates are left unchanged and that I’m expecting, by the end of this year, we have exactly the same interest rate and the Reserve Bank remains fairly cautious against a global backdrop where we still expect things, like US interest rates, to continue to move higher.

BDTV: We had manufacturing and mining numbers out last week so the manufacturing sector — pretty weak in March. We had the mining sector rebounding off a low base. Taking into consideration retail mining manufacturing, we don’t know how that agricultural sector has done. What are you expecting for the first quarter, are you expecting positive growth?

KL: Only just positive growth. Remember that manufacturing is in recession, I would say it’s in a deep recession now because it’s now had three quarters of negative performance and to me that recession is intensifying. So I would say manufacturing is undoubtedly in recession. The recovery was really mining. Mining had a very good March report and generally commodity prices are up a little bit. China is doing better, the world economy global trade is doing better, so it’s not surprising that mining has recovered a little bit. Off a low base, but that should cushion the overall effect.

And then agriculture ... I looked at the expectations for the maize crop, expected to be 87% bigger this year than last year, so I’m hoping that agriculture combined with mining helps us to avoid SA going into a technical recession. But we mustn’t let that fool us. The underlying core activity in SA being things like finance, retail and manufacturing — incredibly weak and weakening still and so that overall SA remains vulnerable of going into an outright recession.

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