The March figures for retail sales growth from Stats SA confirm the “normalisation” that has taken place with respect to this metric in the past couple of months. Because low base effects have fallen away — in the absence of strict lockdowns with respect to liquor or other retailing — growth rates are now much more stable. However, there is a definite inverse correlation between interest rates and retail sales growth; as interest rates rise, so eventually retail sales growth falls and vice versa. SA is now on an upward trajectory as far as interest rates are concerned, so the general trend in retail sales growth from now should be downwards. Overall, retail sales growth for March was 1.3% when measured on a yearly basis.
The best performing retail category was pharmaceuticals, toiletries & cosmetics, with year on year sales growth of 6.2% and the worst performing category was hardware, paint & glass — effectively a proxy for DIY outlets, which recorded a 12.4% contraction. Household furniture, appliances & equipment came in a with a surprisingly strong 5.5% sales growth year on year after a few months of marginal growth, while clothing, footwear, textiles & leather (CFTL) continued its slump, registering growth of just 1.9% from a year earlier.
Both of the food categories — general dealers, and food, beverage & tobacco retailers in specialist stores — have settled down to their traditionally marginal sales growth rates. The diverse “all other retailers” category rose by 3.5%.
The household furniture & appliances category had been particularly strong for a long time, due mainly to the so-called homebody economy that arose as a direct result of many more people working from home. But sales growth in this category crashed in June last year and has remained relatively low ever since. Considering that this is arguably the most discretionary of all categories in retail sales, we should expect to see it continue to stay in relatively low to slightly negative territory for the foreseeable future.
CFTL had been growing strongly for the better part of a year until very recently. This was mainly due to persistent pent-up demand, but another positive factor appears to have been the diversion of funds that would have gone to overseas holidays in December 2021 and January 2022 as a result of SA’s travel red-listing. The main beneficiaries of this greatly improved background should be JSE-listed clothing retailers such as Mr Price, TFG and Truworths. However, in February, this pattern changed considerably, with clothing sales growth crashing.
SA is predominantly a consumption-based economy and so the trajectory of retail sales is important in determining where GDP is headed. Household consumption expenditure is currently about 60% of total GDP and it’s sensitive to the impact of interest rates. In the past six months, the prime lending rate has risen from 7% to 8.25% and is likely to go significantly higher, depending on what happens to the inflation rate during 2022 and 2023. Inflation is being driven mainly by extraneous factors such as energy and food, rather than excess demand. Thus, the unintended consequence of raising interest rates under such conditions will ultimately be to choke demand while doing little, if anything, to contain inflation.
Also, SA has the second-highest real interest rate in the world after Indonesia, as proxied by the yield on the 10-year government bond. Provided that the real yield remains the same or improves, foreign money will continue to be invested locally. So there is another reason that interest rates are likely to keep on rising, even though demand is relatively weak.
For non-discretionary retailers, such as the food & drug retailers, the effect should be less apparent than it will be on discretionary retailers such as the clothing and furniture segment. It will be especially apparent where consumers buy their goods on credit and interest rate rises make the cost of credit that much more expensive.
• Gilmour is an independent investment analyst with Salmour Research.
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