Christmas Sales Outlook
Published |
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2011
Thu
03
Nov
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By Luke Doig, Senior Economist, Credit Guarantee Insurance Corporation
Headline consumer inflation in the first nine months of 2011 mirrors that of the same period a year earlier at 4.6% but this masks the recent upward trend. Similarly, factory gate prices (producer price inflation) have risen 7.4% on average in the first eight months of 2011 compared to 5.9% over the same period last year, but risk spiking well into double digits in the months ahead. The negative impact of rapidly escalating administered prices is also evident from the graph below. Broadly speaking, many industries are reporting sluggish turnovers, increased competition, rising input costs and consequently tighter margins. We expect growth to track sideways in the 3% region. The SARB thus faces a conundrum – they are aware that job creation prospects and the growth outlook are listless but will this outweigh higher inflation? A stay of execution for interest rates - with the prime overdraft rate remaining at 9% - is likely for the next 12 months despite growing calls for more respite.
Despite personal sequestrations showing a 34.1% decline in the first seven months of 2011, and formal company liquidations a similar 17.1% improvement in the first eight months, there remain concerns as to the overall health of the credit environment. The business rescue provision in the new Companies Act initially gave rise to abnormal improvements in officially reported business delinquencies but this has since reversed. Delaying tactics by some to avoid paying creditors timely also clouds the issue.
National Credit Regulator statistics on new credit extended reveal an interesting trend. In the fourth quarter of 2007 unsecured lending accounted for just 7.8% of all new credit extended but this rose to 22.2% in the second quarter of 2011. Conversely, new mortgage lending accounted for just 29.9% of all new credit extended in the second quarter of 2011, down from 51.9% in the fourth quarter of 2007. Is this new trend evidence of distress borrowing to fund day-to-day expenses? Further, when one considers impaired advances by banks as a proportion of total loans and advances, one finds that the elevated levels built up as consequence of the 2009 recession have only receded marginally.
Our leading indicator for potential payment defaults has fallen 12.6% in number over the first three quarters of 2011 and the values involved have shrunk by 7.2%. When one considers the gargantuan increases seen in this indicator and in fact in most credit default indicators in 2009, the improvement last year and further into 2011 has been modest.
Christmas sales
We premised our 2010 Christmas retail sales outlook (November/December) of 9.8% nominal and 9% real growth on substantially lower debt servicing costs. Debt service costs (as a percentage of disposable income) were forecast at 7.7% in 2010 – well below the 12% seen at the peak of the cycle. While above the 6.5% level seen in 2004/5, this was nonetheless expected to provide a much-needed boost to consumption expenditure. Outcomes of 9.2% and 8.2% in nominal and real terms respectively were ultimately achieved for 2010 festive season sales.
In the first half of 2011, real demand (Gross Domestic Expenditure) rose 4.6% while real growth of 4.9% in final consumption expenditure by households (FCEH) was recorded. Following on from the strong showing in sales of household electronics in the run-up to the FIFA World Cup last year, sales of durable goods (vehicles, furniture, appliances and electronics accounting for 7.4% of total current FCEH) have benefited from a strong exchange rate, with real sales growing 17.1% in the first half of 2011. Similarly semi-durable sales (clothing, footwear, household textiles, tyres and vehicles parts, 8.7% of FCEH) performed well in the first half of 2011 while inflationary pressures in non-durables (essentially food and power/fuel, 40% of FCEH) translated into a scant 1.7% real improvement in the first half of 2011. Spending on services (rent, medical, transport and communication, 43.9% of FCEH) also rebounded in the first half of 2011, with real growth of 5% following calendar 2010’s mediocre 1.9% real expansion.
Final consumption expenditure by households (FCEH): 1st half 2011 vs 1st half 2010
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Durables
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Semi-durables
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Non-durables
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Services
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Total
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Nominal
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12.4%
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6.1%
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8.3%
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10.7%
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9.4%
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Real
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17.1%
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4.7%
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1.7%
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5.0%
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4.9%
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Source: SA Reserve Bank Quarterly Bulletin
Wholesale sales have risen 11.5% and 5.4% in nominal and real terms respectively in the January-August 2011 period while retail sales in the first eight months of 2011 were 7.4% and 5% higher in nominal and real terms respectively. Concerns are however being raised as to the sustainability of this, given high base effects from the 2010 World Cup and pressures on individuals’ income statements.
The improving contribution of Christmas to total retail sales to 20.5% last year was a welcome recovery from the 20% seen in 2009 but still below the 21.4% experienced in 2005. Will this trend continue and bring a smile to many manufacturers, wholesalers and retailers? Despite the challenge that the SARB faces in trying to balance inflation worries against growth and job prospects, we foresee flat rates enduring. Together with the amelioration in the household debt to disposable income ratio of 75.9% in the second quarter of 2011 – from an annual rate of 78.2% last year – we expect debt service costs to fall further to sub-7% levels this year. We are however cognisant of some evidence of a degree of distress borrowing taking place while rising inflationary pressures and job insecurity also provide headwinds.
One issue that would potentially boost the situation relates to restocking, given that inventory levels have been ruthlessly rundown in recent times with industrial and commercial inventories to GDP falling from 17.3% in 2007 to 12% last year and remaining there in the first half of 2011. In our opinion, recent wholesale sales data hint at a recovery of restocking in the third quarter of 2011, although lower stock levels and later ordering – justified in turn by the uncertain outlook – do appear to be becoming entrenched.
We foresee Christmas sales growing by at least 7.5% in current prices and around 4% in real terms whilst adding that we would not be surprised if this was exceeded. We are always wary of resultant potential stock overhangs in the first quarter of the new year and hence our advice to manufacturers and wholesalers at present would be to insist on short terms and to be wary of abnormally large orders.
Table – Christmas retail sales analysis
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2004
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2005
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2006
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2007
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2008
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2009
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2010
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2011 f
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|
Nominal – Rbn
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66391
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74501
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85317
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93062
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103788
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105992
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115752
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124400
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% share
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21.0%
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21.4%
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21.2%
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20.6%
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20.6%
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20.0%
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20.5%
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20.5%
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% increase
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12.2%
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14.5%
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9.1%
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11.5%
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2.1%
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9.2%
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7.5%
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Real – % increase
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10.4%
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10.2%
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1.9%
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-0.9%
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-3.2%
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8.2%
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c.4%
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Prime: yr-end (%)
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11%
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10.5%
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12.5%
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14.5%
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15.5%
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10.5%
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9%
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9%
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Source: Stats SA; CGIC analysis and forecast
Source: Corporate Communications Consultants (Pty) Ltd
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