Economic corner is turned, retail barometer confirms

While economists are generally noted for their sometimes unfounded optimism, the latest research from the Bureau for Economic Research (BER) and FNB appears to confirm that the recession is indeed over. Its first quarter Retail Survey confirms a continuing positive trend in consumer confidence, building on the turn in sentiment first seen late in 2009.

According to Derek Engelbrecht, Director and Retail Sector lead at Ernst & Young, retail trends are a sure indicator of economic health. “When consumers have money to spend, it shows that they are not doing too badly. Along with the improving confidence in the retail sector, there is also evidence from various property barometers that the housing market is picking up after a sustained period of stagnation.”

Noting that the current reading of +15 in the FNB/BER Consumer Confidence Index shows an increase of 9 index points - from +6 during 2009Q4 - is the highest since 2007Q4, Engelbrecht also points out that it is substantially higher than the long-term average of +2.

And it’s not just in the groceries department that consumers are expressing greater confidence. “Perishable goods and essential purchases are one thing; durable goods quite another. The telling metric is therefore that the index has risen by 11 points in terms of consumers rating the present as an appropriate time to buy durable goods,” Engelbrecht says. The biggest single increase since 2004 brings this index to -4, the highest level seen since 2008Q1.

With government figures indicating that the economy grew by 3.2% in the last quarter of 2009 and 2.5% expected in 2010, congruently positive expectations are apparent in consumers, Engelbrecht continues. “Consumers expecting an improvement in South Africa’s economic performance during the coming year increased from +16 to +23 index points. The same increase was noted in the number of people expecting their own finances to improve, with this index moving from + 18 to +25.”

It is notable, too, he says, that the confidence levels of all income groups is on the up; but it is middle income consumers who are most buoyed. “Confidence amongst low income earners recorded only a slight increase, perhaps owing to the unfortunate possibility that job losses are more pronounced in low income vocations.”

Turning his attention to the retail industry, set to benefit from the increase in consumer confidence, Engelbrecht says the third consecutive increase in confidence brings business confidence to 51 points. “This confirms definite signs of recovery; however, big ships do turn slowly and the full effect of recovering consumer confidence has yet to be felt on the shop floor.”

So, the improvement for business is evidenced in a reduced deterioration, rather than a turnaround, of overall business conditions, sales volumes and profitability deteriorated to a lesser extent. “Overall, sales continued to contract, but not evenly. While volumes of both durable and semi-durable goods picked up, retailers within the non-durable goods sector still experienced bigger declines in sales than in the previous quarter,”

The sector continues to shed jobs, with 24% and 35% of respondents in the retail and wholesale sector respectively indicating reductions in labour forces in this period. Despite that, Engelbrecht notes that wholesaler confidence recorded its biggest single quarterly increase since 2002Q1, jumping 23 points to 50. “This is despite weak sales and reduced profitability, but confirms that wholesalers are seeing the signs of revitalization from more active consumers,” he says.

Pointing out that recovery from a recession which came as a shock to many will not be an overnight process, Engelbrecht says it is clear that a more positive picture is emerging. “Momentum is gathering; if the economy can deliver on expectations through 2010, it is likely that confidence will continue to improve; better confidence is likely to be followed by improved performance.”