July Real Retail Sales growth numbers show still slower year-on-year growth, and the sharp negative growth in the highly cyclical Household Furniture, Appliances and Equipment segment of Retail may be a leading indicator of more growth slowing to come. FNB projects 1.9% average Real Retail Sales growth for 2016, down from 3.3% in 2015.
Real Retail Sales growth for July 2016 slowed further from 1.4% year-on-year in the previous month to 0.8%. This release doesn’t surprise too much, as other early-3rd quarter stats from the likes of Mining and Manufacturing, and New Passenger Vehicle Sales (along with certain of FNB’s own Housing Market stats) have pointed to possible renewed economic weakness in the 3rd quarter after a better 2nd quarter.
However, monthly figures are traditionally volatile, so FNB prefers to analyse the data using a 3-month moving average, which grew year-on-year by 2.0% for the 3 months to July 2016. This 2.0% growth in the 3-month moving average is down further from the 2.2% for the 3-months to June, and now noticeably slower than the 3.9% high reached in the 3 months to February 2016. There does appear to have been some broad slowing in growth since early in 2016 therefore.
• July Retail Price Inflation the highest since December 2009
The slowing in the real year-on-year growth in the month of July was a combination of a slight de-celeration in Nominal Retail Sales Growth in that month to 7.5%, from 7.7% previous, and Retail Price Inflation accelerating from 6.2% in June to 6.7% year-on-year in July. The Retail Sector has for a long period been supported by low price inflation, below that of overall CPI (Consumer Price Index) inflation.
But that may have come to an end for the time being. The July Retail inflation rate was the highest since September 2009.
• Food price inflation continues to be troublesome
During July, General Dealer Retail Price Inflation at 8.5%, and Specialised Food Retailer Inflation of 7.7% year-on-year remained the 2 troublesome areas of Retail from a price inflation point of view.
Drought conditions were still in the process of feeding into domestic food retail prices in July it appears.
On the low side, Hardware, Paint and Glass Retailers showed price inflation of a mere 1.1%, while Household Furniture, Appliances and Equipment Retailers showed 3.9 retail price inflation year-on-year for July.
• Food Retail growth remains sluggish, and for good reason given the high price inflation
Food consumption is typically less cyclical than, say, durable and semi-durable consumer goods. However, food price surges do often constrain growth in real food spending and thus food-related Retail on the Specialized Food Retail side.
It is thus not surprising, given their higher than average Retail Inflation rates, to see Specialised Food Retailers experiencing very weak real growth of late, with a year-on-year rate of +0.3% for the 3-months to July 2016. General Dealers, however, don’t yet seem to be experiencing as much pressure from high price inflation, with their own sales growing by a stronger 2.6%. But they too are off prior months’ highs.
• Is Household Furniture, Appliances and Equipment Retail decline a leading indicator of things to come?
A potential “leading sector” is that of “Household Furniture, Appliances and Equipment” Retail. This area of retail is significantly credit dependent, and can be sensitive to interest rates and the economy. Much of its items are not “urgent necessities” either, so the purchase can be postponed in tougher times.
Therefore, it is not too surprising to see the 3-month average for this Retail category declining sharply by -5.8% year-on-year for the 3 months to July 2016.
FNB’s Estate Agent Surveys have pointed to “leveling out” and even some possible slowing in levels of home maintenance and upgrades in recent quarters. But as of yet, a move into negative growth in the Hardware, Paint and Glass Product Retail category has not been seen. To the contrary, its growth of 2.3% for the 3 months to July remains slightly stronger than overall Retail Sales growth. But its growth too has slowed.
• “Pharmaceuticals and Cosmetics” was again the strong point in Retail
The star performing sector of mainstream Retail for the 3 months to July was “Pharmaceuticals, Medical, Toiletries and Cosmetics” Retail with 7.1% year-on-year growth, and this category has been showing broadly accelerating growth through 2015/16..
But the more cycle-sensitive Textiles, Clothing and Footwear Retail appears to have felt the lagged impact of economic weakness, and while still showing a reasonably good growth rate of 2.7% year-on-year for the 3-months to July, the rate has slowed since the 5.5% high at the end of 2015.
CONCLUSION AND OUTLOOK
For the 1st 7 months of 2016, average year-on-year growth in Real Retail Sales was 2.5%. However, that average rate is kept “respectable” by higher growth rates in earlier months of the year.
More recently, growth weakness has begun to set in, a lagged response to the economic stagnation of recent years. Despite 2nd quarter year-on-year Real Economic Growth of 0.6% being slightly better than the 1st quarter’s small contraction, that growth remains poor. In addition, early 3rd quarter high frequency indicators, including July/August New Passenger Vehicle sales, and July/August Manufacturing PMIs, point to renewed economic weakness possibly re-emerging in the 3rd quarter of 2016 after a slightly better 2nd quarter. This would impact on Consumer demand and Retail.
Therefore, the further slowing in Real Retail Sales comes as little surprise. FNB thus remains of the view that the average growth in Real retail Sales for the entire 2016 will be lower than the year-to-date average, and project a 1.9% average growth rate as a result of late-2016 growth weakness. Should such growth materialize, it would be a relatively good outcome for Retail, given an Economic Growth projection of a mere 0.2% for the entire year.
Realistically, though, looking into 2017, FNB believes that Real Retail sales growth will not be able to continue to grow above economic growth as it has for some time. That could imply real growth rates nearer to 1%.