Another rate cut may not be the quick fix we hope for
It doesn’t take much to trigger an interest rate debate. Let slip the latest economic statistic and you’re bound to get the room buzzing. The big talking point this week is South Africa’s June 2010 retail sales number. We’re finally getting an idea how much of an impact the 2010 FIFA World Cup ™ had on the country’s shopping centres and restaurants. The latest survey shows a 1.8% month-on-month (m/m) improvement in retail sales over May 2010, with a sturdy 7.4% for June year-on-year. Retail analysts couldn’t hide their enthusiasm. They crowed about the 7.4% annual growth being the highest since early 2007 – and celebrated the sixth consecutive month of positive year-on-year growth.
Is this improvement entirely due to “World Cup” visitor spending? Kevin Lings, economist at StanLib says the strong pick-up in retail activity during both May (1.3% m/m) and June (+1.8% m/m) was, at least partially, driven by the event. In search of more information we tuned in to 702 Talk Radio late yesterday afternoon. They said restaurants enjoyed a mini-boom, while sales of appliances, cosmetics, pharmaceuticals and clothing all surged higher in June. Goods such as hardware, paint and glass attracted little interest – with books the surprising loser, down 25%.
We told you – interest rates sneak in through the side door
According to Reuters the case for another interest rate cut is “bolstered” due to the retail sales number being slightly weaker than expected. Their argument gathers momentum on expectations of “softer” sales in August, September and October this year. Is there room for another cut when the Monetary Policy Committee meets on 8 and 9 September? The question is whether the bank has the stomach to push rates lower after an already healthy 550 basis point cut between December 2008 and March this year.
“One has got to be more forward-looking with retail sales because there won’t be the benefit of the World Cup any more,” observed Brait economist, Colen Garrow, laying down a challenge to the Reserve Bank to cut rates rather than wait for the retail numbers to slide again. Razia Khan, head of Africa research at Standard Chartered, seconded the plea: “Given the uncertain jobs market, evidence of still sluggish growth and a weak pick-up in bank credit, we would not overplay the importance of another cut!” The last economic presentation we attended was given by Old Mutual Investment Group SA (Omigsa) economist Rian le Roux. He reckoned another 50 basis points was a distinct possibility.
These experts believe another rate cut will put more money in consumers’ hands and revitalise each and every local retail sector. Unfortunately their faith in interest rates as a means of stimulating the consumer economy is misplaced. In a recent column in The Times, market commentator David Shapiro (of SasFin) said these ‘savings’ were simply being “gobbled up” by higher taxes and administered prices.
Get real – households are in as much trouble as before
We can list plenty of trends that should be impacting positively on households. Consumers – though struggling with high levels of personal debt – should benefit from the current low interest rate environment (like it or not we’re very near the bottom of the current cycle), moderate inflation (until the next round of public sector strikes filters through) and a better outlook on the local jobs front. Does this mean we’ve shaken off the ill winds of recession?
Lings isn’t entirely convinced. “This doesn’t imply consumers will be able to achieve significant increases in discretionary spending during 2010 and 2011,” he said. The consumer is snowed under by inflation-plus increases in a range of administered goods and services, including electricity, water, health insurance, education, petrol and toll fees! Any improvements will hinge on employment and a significant softening of banks’ lending policies rather than further interest rate cuts.
Editor’s thoughts: As we pen this newsletter South Africa’s public sector trade unions are threatening to strike until the end of 2010. Government is offering a R700/month housing allowance and a 7% pay hike – the unions want R1 000/month and 8.6%! Problem is the “gap” will cost the country’s already hard-pressed taxpayers another R5 billion each year. Do public sector workers deserve this hike given current perceptions around productivity? Add your comment below, or send it to [email protected]
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