Real Retail Sales growth is still “solid”, but the Retail Property Sector will probably have to contend with slower growth in 2016, as much of this recent strength is due to a period of temporarily low inflation, along with certain “leads and lags” in the economy, reports John Loos, FNB household and property sector strategist in the bank’s latest note regarding December retail sales.
The retail numbers
Real Retail Sales growth for December 2015 continued to record an exceptionally healthy growth rate under the weak economic circumstances. From a 3.8% year-on-year growth rate for November, December’s rate rose further to 4.1%. This remains very strong considering a 3rd quarter real economic growth rate of nearer to 1%.
Cutting out data volatility by looking at the 3-month moving average, real year-on-year sales growth was 3.8% for the 3 months to December.
The still-solid real growth is mostly explained by a period last year of very low inflation, driven down late in 2014 and early-2015 by a major oil price fall. From a 6% year-on-year high in August 2014, retail price inflation slowed to 3.7% by July last year. That low inflation rate has begun to turn lately, rising to 4% by December, but for the time being this is still a very good number, supportive of good real sales growth.
It isn’t entirely about low inflation, however. There has also been some nominal retail sales growth acceleration of late, with the year-on-year growth rate reaching 7.8% for the final 3 months of 2014, slightly higher than the 7.3% for the 3 months that made up the 3rd quarter of 2015.
Main sub-categories of retail
For the 3 months to December 2015, the Retailer Category with the fastest year-on-year real sales growth was the broad “Textiles, Clothing and Footwear” category with 5.7%. This was followed by Pharmaceuticals Medical, Toiletries and Cosmetics” with 5.1% growth.
General Dealers” were also healthy, with growth of 4.2%.
“Specialised Food, Beverages and Tobacco Stores” fared poorly with -0.2% decline.
The more cyclical categories of “Mainstream Retail” have for some time been sluggish. These are the Housing-related retail categories.
Typically, a leading area of consumer demand in the cycle is the area of Durable Goods Consumption. Household Furniture, Appliances and Equipment Retail falls strongly into this Durables category. Although this category was off its low of -6% year-on-year decline for the 3 months to October, it remained in decline to the tune of -1.6% for the 3 months to December.
This weakness seems to tie in with a recently slow growth rate of Real Durable Consumption Expenditure, as per the SARB quarterly data, which also dipped into negative growth territory in the 3rd quarter of 2015.
The other residential-related retail category, i.e. Real Hardware, Paint and Glass Products Retailers, has not reached negative territory, but remained in slow growth territory to the tune of 2% year-on-year for the 3 months to December.
Conclusion and outlook
Real retail sales growth remained solid under the weak economic circumstances in 2015, averaging 3.3% for 2015 as a whole, up from a 2.1% average for 2014.
However, we believe that this period of relatively good real growth was largely due to a period of low retail price inflation. From a 5.2% average retail price inflation rate in 2014, the 2015 inflation rate slowed to average 4.1%. That largely accounts for an acceleration in sales growth in real terms.
Looking into 2016, the jump in the January CPI inflation rate, from 5.2% in December 2015 to 6.2% in January, likely points to a noticeably higher average retail price inflation rate to follow in 2016. This is expected to translate into slower real retail sales growth once more.
A good leading indicator of Real Disposable Income growth is the rate of change in the OECD Leading Business Cycle Indicator for South Africa. After some acceleration through late-2014 and early last year in both, we have seen the Leading Indicator’s year-on-year rate of decline picking up downward speed late in 2015, pointing towards slower Real Household Disposable Income growth to come in the near term.
In addition, throughout 2015 the FNB-BER Consumer Confidence Index recorded extremely weak readings, probably pointing ultimately to weaker consumer demand.
Much of this weakness in consumer demand has perhaps already been reflected in areas of consumption outside of mainstream retail, for instance in the area of Motor Vehicle and Related Trade.
Our calculation of Real Motor Vehicle Sales growth (converted to real terms from StatsSA nominal sales figures), measured a decline of -2.5% average for the 1st 11 months of 2015, following on a -4.4% decline in 2014.
Vehicle sales tend to be a useful leading indicator for certain other areas of consumption and retail.
Therefore, we are anticipating a slowing in real retail sales growth, down into the 1-2% average range for 2016, slowed by rising consumer price inflation as well as our expectation of a further slowing in real economic growth. In addition, we anticipate further gradual increase in interest rates through 2016, as consumer inflation rises.
Much of the recent relative strength in retail, we believe, can be attributed to “temporarily” low retail price inflation, which looks to be coming to an end, along with “leads and lags” which have yet to play out in full in “mainstream retail”.