Retail sales reflect a shift in spending priorities
Retail sales volumes have declined for three consecutive quarters when compared to the corresponding period last year. Excluding the disruptions induced by Covid-19, this marks the longest streak of volume decline since the global financial crisis, when losses extended for six consecutive quarters. This trend is indicative of the challenging economic climate characterised by high inflation, subdued wage growth, and suppressed consumer sentiment.
While official headline inflation has decelerated to 4.7% in July, implied retail goods inflation remains elevated and exceeds the inflation target band at 7% in June - the latest available data point (Figure 1). In fact, retail goods inflation surpassed headline inflation since January 2023, partly due to retailers recovering higher operational costs associated with investments in back-up energy. However, given the weak demand conditions, it is unlikely that retailers have been able to fully pass on these costs to consumers. This could result in retail price growth remaining relatively high even as overall inflation slows toward target. Furthermore, while employment data indicates a sustained but prolonged recovery in the labour market, unemployment remains high and wage growth lags inflation. GDP data showed that compensation of employees (total wage bill) increased by 5% y/y in 2Q23, lower than 6.2% headline inflation during the same period. All these factors suggest reduced purchasing power for most consumers.
Against this backdrop, year-to-date (YTD, January to June) retail volumes have decreased by 1.2% compared to the same period last year. Demand has declined across all categories, except for clothing and footwear (Figure 2). Consumers appear to be reallocating their spending from home improvement-related categories to outdoor activities, aligning with the recovery in tourism and hospitality since the Covid-19 period. Notably, spending on clothing and footwear may be supported by the strong demand and supply of clothing accounts/store cards. However, retailers have recently scaled back on issuing new store cards, citing deteriorating credit affordability. According to NCR data, store card originations declined by 9.5% y/y in 1Q23, following a robust 23.6% increase in 2022. Additionally, anecdotal evidence from credit bureaus suggests that existing account holders continue to leverage their accounts, indicating cash-flow constraints.
Beyond the clothing and footwear category, the overall decline in retail spending contrasts with the robust consumption-oriented credit uptake (unsecured credit), comprising general loans, overdrafts, and credit cards. Unsecured credit uptake from the banking industry increased by 6.9% y/y in July, over 2% inflation-adjusted growth, although it has slowed from the recent peak of 10.2% in January 2023 due to tightening lending standards. Since the start of the rate-hiking cycle in November 2021, the outstanding unsecured credit balance has increased by 1.7% in real terms, compared to a 0.7% increase in asset-backed credit over the same period. Demand and supply of credit cards has been particularly strong, with the outstanding balance of credit cards rising by 9.0% y/y in July and maintaining this level since the beginning of the year (Figure 3). According to NCR, which includes lending activity from non-banks, new credit card originations increased by 15.6% y/y in 1Q23, indicating stronger demand for credit cards outside of traditional banks, despite elevated debt-servicing costs and weak income growth.
When assessing the retail sales trend alongside credit uptake, it is likely that consumers are resorting to credit for essential needs rather than discretionary items. Indeed, the latest national accounts data reveals a shift in consumers' spending priorities, favouring essential services such as health, transport, and education. In addition, consumers are spending more on catering, reflecting the impact of electricity disruptions. YTD real spending on all goods (not seasonally adjusted) has marginally decreased by 0.1% compared to the same period last year, while spending on services has increased by 1.4% (Figure 4). This is a much slower rotation to consumption of services, highlighting the budget constraints consumers are facing and the limitation on diversified spending. Encouragingly, the results of the 3Q23 FNB/BER Consumer Confidence survey suggest that consumers are becoming less pessimistic as economic growth has proven more resilient than initially thought, and expectations regarding inflation and interest rates have improved. Ultimately, their ability to spend remains restricted, and this should persist in the near term.
Week in review
As measured by real GDP, the economy expanded by a stronger-than-anticipated 0.6% q/q (seasonally adjusted) in the second quarter, reflecting sustained momentum from a quarterly expansion of 0.4% in the first quarter. Six out of ten sectors recorded growth, with the manufacturing sector contributing the most to the quarterly GDP expansion. GDP was up 1.6% (not seasonally adjusted) compared to the same quarter last year, reflecting positive base-effects. In the second quarter of last year, the KZN flooding, prolonged strike in the gold mining sector, frequent load-shedding, and elevated input costs disrupted economic activity, creating a low base behind this relatively robust annual GDP growth. Encouragingly, the economy expanded by 0.9% in the first six months of the year, placing upward pressure on the consensus forecast of 0.2% growth for 2023. We have subsequently lifted our annual forecast to 0.7% but remain cautious given increased volatility since the pandemic shock, worsened by the dynamic impact of intensified load-shedding, as well as consumer headwinds.
After plummeting to 27 in 2Q23, the RMB/BER Business Confidence Index (BCI) regained some ground to register a level of 33 in 3Q23. Although higher, sentiment is still very weak by historical standards. The challenges posed by relatively high interest rates, the resultant strain on consumers, and social unrest meant that business activity remained constrained. Encouragingly, the slight reprieve in the incidence of loadshedding provided support to some firms, especially in manufacturing. The biggest fall in sentiment in the previous quarter was among the consumer-facing sectors, namely new vehicle dealers and retailers, but both rebounded this quarter. The business confidence of retailers gained 12 index points to reach 32, likely supported by improved profitability on the back of softer purchasing price increases, but sales remained weak. While building work gathered further momentum in 3Q23, building contactor confidence slipped to 41, from 43 previously, likely weighed on by the relative scarcity of building materials and new work.
SA's gross foreign exchange reserves declined to $62.0 billion in August, from $62.2 billion in July. The decrease reflected a lower dollar-denominated gold price, valuation adjustments given foreign currency movements, as well as government-related foreign exchange payments. These were mitigated by asset price changes.
The current account deficit widened to R160.7 billion in 2Q23 from R63.7 billion (revised up from R66.2 billion) in 1Q23. As a percentage of GDP, the current account deficit was -2.3% in 2Q23, compared to -0.9% (revised from -1.0%) recorded in 1Q23. The worsening in the current account balance reflected a narrowing in the trade balance, given weaker terms of trade as well as buoyant import volumes. Overall, the trade balance on goods fell to 0.4% of GDP, from 1.6% previously, while the balance on services, income and transfers slipped to -2.8% of GDP, from 2.6% previously. The consensus expectation is for the current account to average -2.2% of GDP this year, but this was with a -1.5% 2Q23 prediction. These more adverse outcomes highlight the impact of weaker export commodity prices and local infrastructure constraints, which should be exacerbated by continued investment in alternative sources of energy and rising oil prices. A current account deficit reflects a lack of savings generated in the local economy which will have to be sourced externally, likely placing upward pressure on the yield required to access those funds.
Electricity production (not seasonally adjusted) fell by 3.4% y/y in July, marking 22 consecutive months of annual contraction. The decline in July was shallower than the 7.3% annual contraction recorded in 1H23. Seasonally adjusted electricity production reflected a weak start to the third quarter, declining by 2.4% m/m, following a monthly expansion of 4.2% in June. The continued decline in electricity production underscores a reduction in Eskom's energy availability factor (EAF), which at the time of writing was around 54.4% YTD, lower than the 63.2% and 59.6% recorded over the corresponding period in 2021 and 2022, respectively. At the start of this week, breakdowns were around 16500 MW, while Eskom has also increased planned maintenance to over 5000MW. In line with this, electricity consumption also weakened further at the start of the third quarter, falling by 3.1% y/y and 2.6% m/m. YTD, electricity consumption is lower by 6.1% compared to the same period last year, and is currently 52.5% of total electricity consumed in 2019.
The FNB/BER consumer confidence index improved to -16 index points in 3Q23, this is after plunging to -25 points in 2Q23 from -8 points in 4Q22. This reading reflected a rebound in the confidence of higher-income households, which was likely weighed on by adverse political and economic events during 2Q23. Nevertheless, confidence across the spectrum remains below the long-term average, highlighting concerns regarding general economic prospects. While consumer perceptions of the appropriateness to purchase durable goods at present are less pessimistic, views on expected household finances have barely changed. This suggests some contention within consumers, as softer inflation and continued job creation should allow slower real wage compression and strengthen spending capacity, but this is confronted by a resilient US economy that poses upside risk to global financial conditions, risk aversion, and the rand. Ultimately, confidence is less pessimistic, but still weak.
Week ahead
On Monday, the inflation expectations survey outcome for 3Q23 will be published. In 2Q23, near-term inflation expectations edged higher, revealing the impact of inflation outcomes that were above 6%. Current-year (2023) expectations lifted to 6.5% from 6.3% previously, while one-year-ahead (2024) expectations edged up to 5.9% from 5.8% previously. Even as shorter-term expectations lifted, five-year-ahead expectations moderated, indicating that perceptions of longer-term inflation have started to respond to the prevailing hiking cycle and will likely shift even lower as near-term inflation slows. In addition, wage growth expectations have softened, alleviating fears of a wage spiral and should reinforce slowing inflation. Despite expectations remaining above the monetary authority's preferred anchor, the MPC has showed willingness to look through this backward-looking process, trusting that the transmission of monetary policy will eventually lower inflation sustainably and soften expectations.
Also on Monday, manufacturing production data for July will be released. Total manufacturing output (not seasonally adjusted) expanded by 5.5% y/y in June, reflecting an acceleration from 2.4% y/y in May. Seasonally adjusted manufacturing output increased by 1.2% m/m after shrinking by 1.3% m/m in May. YTD growth in manufacturing output was flat (0% y/y) but was an improvement from the 1.2% decline during the corresponding period last year. However, the manufacturing sector is likely to reflect mild weakness over the 2H23, given prevailing load-shedding and logistics challenges, as well as moderating global demand. This is consistent with the latest manufacturing PMI for August, which remained in contractionary terrain (i.e., below the 50-neutral mark) for the seventh successive month.
On Wednesday, the FNB/BER building confidence index for 3Q23 will be published. Building confidence shed five points to register a level of 28 in 2Q23. Building material manufacturers were lone gainers, while quantity surveyors, architects, hardware retailers and building sub-contractors were more pessimistic. The confidence of main contractors was unchanged, at a relatively robust but still contractionary 43 index points. However, activity declined, reflecting higher interest rates and a slowing semigration trend that is starting to weigh on building activity in the Western Cape, which has performed relatively well in the past few quarters. Of additional concern is the broad-based expectation that activity and hardware retail volume sales will likely come under further pressure over the short term. In contrast, activity at the start of the building pipeline improved (architects and quantity surveyors), although it remains to be seen whether this translates into better activity down the value chain.
On Thursday, data on mining production for July will be released. Mining output (not seasonally adjusted) expanded by 1.1% y/y in June after shrinking by 0.7% y/y in May. Seasonally adjusted mining output also expanded by 1.3% m/m following a monthly contraction of 3.8% in May. Despite signs of resilience in the sector, challenges prevail - which include infrastructure constraints as well as moderating external demand. The latter has contributed to softer commodity prices relative to last year, weighing on earnings and the mining sector's contribution to government tax revenue collection.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 5 Sep | SA | GDP s.a. % q/q | 2Q | 0,6 | 0,4 |
| SA | GDP % y/y | 2Q | 1,6 | 0,2 | |
| 6 Sep | SA | Business Confidence | 3Q | 33 | 27 |
| 7 Sep | SA | Gross Reserves $billion | Aug | 62.0 | 62.2 |
| SA | Consumer Confidence | 3Q | -16 | -25 | |
| SA | Current Account Balance Rbillion | 2Q | -160.7 | -62.7 | |
| SA | Current Account as a % GDP | 2Q | -2.3 | -0.9 | |
| SA | Electricity Consumption % y/y | Jul | -3.1 | -3.2 | |
| SA | Electricity Production % y/y | Jul | -3.4 | -3.7 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 11 Sep | SA | Manufacturing production % m/m | Jul | -- | 1.2 |
| SA | Manufacturing production % y/y | Jul | -- | 5.5 | |
| 13 Sep | SA | FNB/BER Building confidence index | 3Q | -- | 28 |
| 14 Sep | SA | Mining production % m/m | Jul | -- | 1.3 |
| SA | Mining production % y/y | Jul | -- | 1.1 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 73,185.12 | -2.4% | -5.0% | 9.7% |
| USD/ZAR | 19.18 | 1.6% | 2.5% | 11.0% |
| EUR/ZAR | 20.51 | 0.2% | -0.3% | 18.8% |
| GBP/ZAR | 23.91 | 0.0% | 0.0% | 20.1% |
| Platinum US$/oz | 909.22 | -6.4% | -1.6% | 4.3% |
| Gold US$/oz | 1,919.68 | -1.1% | -0.9% | 11.7% |
| Brent US$/oz | 89.92 | 3.5% | 5.4% | 2.2% |
| SA 10 year bond yield | 10.38 | 1.2% | 1.3% | -0.3% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f |
|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | 0.2 | 1.0 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 1.2 | 1.1 | 1.1 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 4.2 | 3.1 | 4.2 |
| CPI (average) %y/y | 4.5 | 6.9 | 5.9 | 5.0 | 4.8 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.0 | 4.7 | 4.9 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.25 | 7.50 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 11.75 | 11.00 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.40 | 18.00 | 17.50 |
