Johannesburg - The Bureau for Economic Research (BER) said on Thursday in its second quarter retail survey that while there has been a respite in confidence, the expectations of respondents signal tough times ahead.
The slight advance in retail business confidence may thus turn out to be only a temporary respite from the pessimism of the first quarter, say the researchers.
The vast majority of retailers participating in the survey expect business conditions to deteriorate during the third quarter, which may spark a continuation of the downward trend in confidence that commenced in the third quarter of last year, they add.
The survey reveals that the confidence levels of retailers recovered slightly after reaching a five-year low during the first quarter of 2008. Having tumbled from 71 index points in the fourth quarter of 2007 to 52 index points during the first quarter of 2008, retailer confidence edged up to 56 index points in the second quarter.
The respite in retailer confidence could be ascribed to improved sales growth and profitability compared to a particularly weak first quarter.
According to BER economist Linette Ellis, the best performing retail category was the non-durable goods sector (e.g. food, beverages and pharmaceutical products), followed by semi-durable goods (e.g. clothing and footwear).
The majority of retailers in the interest rate/credit sensitive durable goods category (e.g. furniture and household appliances) reported a further contraction in sales growth and plunging profitability levels during the second quarter.
Conditions set to become more challenging
"It is possible that the sharp decline in retail sales growth experienced in the first quarter, and hence the small recovery in the second quarter, may be related to the abnormally high number of power outages during the first quarter", said Ellis.
Both purchase and selling prices increased significantly during the second quarter, suggesting that inflation is still accelerating. While retailers expect price increases to remain high during the third quarter of 2008, they do not expect further escalations in the inflation rate, the study noted.
According to Ellis, trading conditions are likely to become even more challenging during the second half of 2008. Not only do food and fuel price hikes continue to surprise on the upside, but the prime interest rate increased by another 50 basis points in June 2008 and more hikes may follow (although the BER's baseline view is that we have reached the end of the tightening cycle).
Given the lagged impact of interest rate increases, the trade sector may only feel the brunt of the impact of the latest two hikes (April and June) towards 2008Q4/2009Q1.
Moreover, while the further roll-out of the child support grant and old age pensions may boost spending by the low income group in the short run (and partly explain the second quarter uptick in non-durable goods sales growth), increasing food prices and surging petrol prices are likely to erode this stimulus rather quickly, say the researchers.
They also note that another particularly negative development is the substantial slowdown in employment growth reported by the BER's survey respondents in the manufacturing, building and wholesale sectors during the second quarter of 2008.
In light of the above developments, the BER has made a downward revision to its forecast of household consumption expenditure - they now expect real consumer spending to increase by around 2.5% in 2008 and less than 2.0% in 2009 (compared to 7% in 2007 and 8.2% in 2006).
Growth is expected to slow notably in the non-durable and semi-durable goods retail categories and contract significantly in the durable goods category.
The BER's retailer confidence index depicts the percentage of respondents reporting that they are satisfied with prevailing business conditions. The fieldwork for the survey was conducted between May 5 and June 2 2008 - i.e. before the 50 basis point hike in the prime interest rate that took place on June 13 2008, It took place among the BER's panel of roughly 500 respondents in the retail sector.
- I-Net Bridge