Rate Hike Concerns Likely To Impact On Trade Conditions

Absa and SACOB released the results of the Absa/SACOB Trade Conditions Survey for May 2007. The Trade Activity Index (TAI), that measures current trade conditions, improved from 50 in April 2007 to 54 index points in May 2007, but was still below the 58 of March and February. Nearly all the sub-indices of the trade conditions survey improved during May 2007, except for the price and employment indicators, which remained unchanged from their April 2007 levels.

Sales volumes were up from their April level, but did not fully recover to the robust levels of February and March 2007. However, new orders, backlogs on orders received, supplier deliveries as well as improved inventory levels, support stable and comfortable trade conditions over the short-term. No additional price pressures arose in May. Employment remained in positive territory in May, but kept to the slightly lower level set in April 2007.

Richard Downing of SACOB remarked: "Trade conditions appear to have been moderating since December 2006 and although conditions recovered since the April survey, conditions remained less favourable in May 2007 than in February and March this year. The introduction of the National Credit Act (NCA) on the 1st of June 2007 and higher interest rates announced early June 2007 and the interest rate increases of 2006, could eventually not only contain lending, but also hamper trade conditions."

Although annual real retail trade sales growth as an important indicator of trade conditions, rebounded to 9,3% in the first quarter of 2007 from 8,9% in the final quarter of 2007. Indications are that a cyclical peak has been reached and growth is losing momentum. With inflation eroding real household incomes and debt servicing costs continuing to climb, household spending is expected to moderate during the course of the year.

Ian Marsberg, Absa senior economist noted that: "..the higher prices of fuel and food continue to contribute to increased cost in inflationary pressures. Moreover, excessive wage demands in the absence of a marked improvement in productivity may add to these cost effects."

Even though inflation is expected to dip below the upper band of the inflation target range in the near term, the food and fuel price increases, coupled with rising inflation expectations which appear to be translating into higher wage and salary demands, may lead to further upward pressure on inflation.

Marsberg added, "If the current trends continue, there is a high probability of a further 50 basis point interest rate hike in August 2007, which may lead to a deterioration in the overall trade environment."