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April retail sales disappoint, despite anticipated VAT hike

Absa retail specialist Tsitsi Hatendi-Matika looks at some positives and the big negatives, both now and going ahead.

NOMPU SIZIBA: Retail sales growth came in way lower than expected. For the month of April retail sales grew by 0.5% on a year-on-year basis. The market had expected an increase of 4.5%. April is the month in which South Africans got whacked with increased value-added tax. To break down the number, we speak to Tsitsi Hatendi-Matika, the head retail investment specialist at Absa.

Thanks very much for joining us, Tsitsi. This is quite a deceleration from the 4.8% registered in March on a year-on-year basis. What happened on a month-on-month basis, and a quarterly basis, and what do you think was the driver in the slowdown?

TSITSI HATENDI-MATIKA: If we start off with month-on-month there was a retraction of 1.2%. And then quarter-on-quarter it was a positive 2.1%. This is from the same quarter of last year in 2017. If we look at the drivers, month-on-month one has to keep in mind that there are a lot of public holidays and this would impact the April numbers. And then, if you also think of the VAT, which you mentioned, two increases. So the consumer just feels battered and one can understand how this number was a big disappointment.

And then, just going into the different compositions of these numbers, I think year-on-year it’s important to highlight that all of the retailers were actually the biggest contributors to the positive number – that one was actually was a bit fuzzy in terms of how it’s defined. And then also other positives were from household furniture and appliances, and pharmaceuticals and medical goods.

NOMPU SIZIBA: In terms of household furniture, that’s considered a durable good, so that’s quite positive, isn’t it?

TSITSI HATENDI-MATIKA: That’s absolutely positive. And we’ve seen a trend, if you look at the big one of Q1 GDP, that was also one of the positives in the number. So on the expenditure side we saw households spending a bit more on furniture, which is quite a turn in terms of that trend in furniture sales and spending.

NOMPU SIZIBA: Now, obviously we can’t just look at one number. But when you look at the trend, say maybe on the quarter-on-quarter basis, what are the stats telling you about the state of the consumer? And of course this is in light of the environment that we are in with a very poor GDP print for the first quarter, and so on.

TSITSI HATENDI-MATIKA:  Looking quarter on quarter, the picture differs slightly. All of the retailers again were positive, but the biggest positives here were if you look at the general dealers and then also your textiles, clothing and footwear. So one can also take a bit from that in terms of Easter sales and maybe if you could buy a little bit more in the textile sector. So there you can’t really bend with the trend, if you compare it to month-on-month. So one has to keep different factors in mind and also cyclical factors that come into play.

NOMPU SIZIBA: It looks like we’re going to be experiencing even more increased fuel prices going forward, which really does hit the pocket, especially on a cumulative basis. How will this then inform how consumers spend going forward?

TSITSI HATENDI-MATIKA: I think the fuel prices will be a big detractor from consumer spending. As it is, already consumers have had three increases and, if things stay the same, there is another increase to come. So as it is, there is an under-recovery of 35c on petrol and 32c on diesel. That will impact the consumer, which means you go over R16 now on your 95 octane. So these are factors that one has to keep in kind when one thinks of consumer spending and how the retailers are going to perform.

NOMPU SIZIBA: We have a lot of inflationary pressures coming through. The rand has weakened quite markedly since Mr Ramaphosa came into power, and of course we’ve got Eskom asking Nersa for quite ridiculous increases, and taking them to court about it. What’s your prognosis for the inflation picture and what does that then say about interest rates, especially given that the likes of the US Fed are on an interest-rate-hiking kind of approach at the moment?

TSITSI HATENDI-MATIKA: Unfortunately right now inflation is on the uptick, and we definitely are expecting an increase from the Fed tonight – and a few more for the rest of the year, which is always not a good thing for emerging markets. So we will potentially see a stronger dollar and weaker emerging market currencies, which means a weaker rand will feed into our fuel prices, which means even higher fuel prices. The oil price is also a big factor in our inflation. And then, just looking at the overall picture, as you said, Eskom – if that is changed from the over 5% that’s been printed in by the Sarb, we start to see them potentially going into hikes. So where we had started a cutting cycle, one cannot see how they can proceed with that. So definitely on hold in terms, no more cuts in the near future, and potentially starting to hike as things keep continuing to deteriorate in terms of inflation.

NOMPU SIZIBA: I don’t want to be on this negative path, but it’s very difficult. The business confidence – the RMB/BER Business Confidence Survey shows that business confidence has declined in the second quarter, and part of it is all to do with VAT increases and increases in fuel, etc. But now if BCI does come down, how does that then translate into economic growth and into how the consumer behaves?

TSITSI HATENDI-MATIKA:  When we look at the BCI, it’s one of the things that is a good indictor to see how businesses are thinking and what’s going on in the economy. So when you look at the big down, we went from an uptick in Q1 to 45, and now going back to 39 – which is never a positive thing. And then also looking at the subsectors, the composition of that, big negatives in new vehicle dealer sales, which makes sense because there is a VAT increase. Also the manufacturing sub-index, a massive detractor there, and the retail sub-index. So, as you said one doesn’t want to hang onto the negative, but right now there’s a very little room to move on to on the positive side.

NOMPU SIZIBA:  Alright Tsitsi, we are going to leave it there. Thank you so much for your time.

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