Retail trade fell in January as SA households continued to be low on cash, a signal that tight monetary policy will continue to weigh on consumer pockets in the first half of 2024 before conditions ease.
The slow start to 2024 is captured in Stats SA data released on Wednesday showing retail sales slumped 2.1% in January compared with those of the previous January after December’s upwardly revised 3.2% increase.
Retail trade in January was 3.2% down on December’s, suggesting that consumers had little left after the festive season. Economists said they did not foresee any meaningful improvement in the economy in the near term as structural constraints, and a high-cost environment, continue to weigh on growth prospects.
The slump in retail sales suggests the transmission mechanism of the Reserve Bank policy is in full effect, with global demand conditions unfavourable and domestic demand on a downward slope.
The Bank increased borrowing costs by a cumulative 475 basis points (bps) to 8.25% since the rate-hiking cycle started in November 2021.
Despite inflation rising to 5.6% year-on-year in February — its highest level since October 2023, when the market consensus forecast was 5.4% — Nedbank said it still expected the Reserve Bank’s monetary policy committee (MPC) to start its cutting cycle in July, reducing interest rates by 25 bps at each of the three meetings in the second half of the year.
“Therefore, the prime rate will end 2024 at 11% from 11.75%, with two more cuts in the first half of 2025 taking it to 10.5%,” said Nedbank senior economist Isaac Matshego.
He said Nedbank expected inflation to resume its downward trend in coming months though the decline would be slower than previously expected.
Matshego said that risks to the inflation outlook remain slightly tilted to the upside. He said higher fuel prices were expected to contribute to the consumer price index (CPI) in the next few months.
“Petrol prices increased by another 5.2% month-on-month, and 6.5% year-on-year in March, while gains in global oil prices have offset the slight appreciation of the exchange rate, pointing to more fuel price increases in April. Drier weather conditions due to the El Niño weather pattern in the southern hemisphere could reverse the recent moderation in food inflation,” he said.
Matshego said that the rand’s volatile exchange rate remains a key risk, with the local unit likely to remain jittery due to election uncertainties.
This places households under more severe pressure.
Stats SA reported that core inflation, excluding food and fuel prices, rose to 5% from 4.6%, but the metric is expected to weaken in second half of this year due to weak underlying economic momentum.
A close look at the retail sales data shows the biggest negative contributors to the annual decline were the textiles, clothing, footwear & leather goods category, which fell 6.6%.
Senior economist at Oxford Economics Jee-A van der Linde said conditions were likely to get tougher in coming months for the Reserve Bank.
“We expect the Reserve Bank to start lowering rates from quarter three only. With demand conditions unfavourable, our base case remains for the economy to grow by 0.7% in 2024,” said Van der Linde.
FNB senior economist Koketso Mano said they expected headline inflation to soften to 5.5% in March, but monthly pressure would remain strong.
Mano said that in line with this, the MPC should continue to flag upside risk to inflation and avoid communication that promotes expectations of a swift and steep fall in nominal interest rates.
“Furthermore, real interest rates should remain higher than pre-pandemic levels for the foreseeable future to cater for higher funding costs, given higher real interest rates in advanced markets, as well as above-target inflation expectations — albeit surveyed expectations eased in the first quarter of this year, and real wage expectations remain muted,” she said.
Investec Laura Hodes said it should also be noted that confidence among retailers overall remains highly subdued, dipping to 34 in the first quarter, from 47 previously.
The Reserve Bank is projected to cut rates later in the year, which will provide the indebted with some much-needed relief and should accordingly boost sentiment, supporting Household Consumption Expenditure (HCE) and accordingly retail trade sales.”
zwanet@businesslive.co.za
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