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Consumers with cash in their pockets and cross-border shoppers with billions to spend yearly were immune to rising interest rates and were playing an important part in keeping the country’s retail sector buoyant, according to Brait economist Colen Garrow.

May 22, 2007

By Ethel Hazelhurst

Johannesburg – Consumers with cash in their pockets and cross-border shoppers with billions to spend yearly were immune to rising interest rates and were playing an important part in keeping the country’s retail sector buoyant, according to Brait economist Colen Garrow.

Garrow said data on passenger vehicle sales, credit aggregates and house prices, which showed signs of growth levelling off, were at odds with retail sales data, “which indicate the reverse”.

Statistics SA figures show that real retail sales rose more than 10 percent in the year to March.

“In the past, consumption patterns have responded to higher interest rates,” he says in a report on the retail sector, published yesterday.

But “improvements in household disposable income lend structural support to the view that growth in retail sales may at times ignore the influence of higher interest rates”, he says.

Despite a total increase of 2 percentage points in interest rates last year, “household consumption expenditure rose 7.3 percent over the year, the fastest since 1981.

“Probably the most powerful driver is the large migration of consumers into higher-income, middle-class brackets,” said Garrow.

He referred to data from the SA Advertising Research Foundation (Saarf) that divide the population according to living standards measures (LSM) 1 to 10, with 10 at the top of the income scale.

The data “indicate that, between 2003 and 2005, some 975 000 consumers exited lower-income categories, migrating to higher-income brackets LSM 4 to LSM 7.

“When migration of consumers takes place into higher-income categories, there is a tendency to trade up. Foods such as maize are used less in consumption and consumers diversify to meat and rice products.”

The Saarf figures also show that “some 147 000 consumers exited LSM 8 to ranks within the black elite, LSM 10″, said Garrow.

At the same time, cross-border shoppers are injecting demand into the economy.

“Data [on trade] released by the SA Revenue Service only provides information on the formal sector. But a study conducted by the Strategic Business Partnerships found that a significant amount of cross-border trade takes place in the informal sector, which is not measured in any great detail.

“Foreigners come to South Africa for short periods of time, purchasing merchandise worth an estimated R12 billion in 2005.”

The trends have an important multiplier effect on the economy, which “has moved on from the boom bust cycles of the 1980s and early 1990s and the stable but low growth of the late 1990s”.

Since 2003 “a more exciting trend has emerged, which is catalysed largely by government’s ambitious R417 billion investment spending programme. The 5 percent annual [gross domestic product] growth over the past three years appears to be only the beginning of a more prolonged upward phase of the business cycle”.

Garrow predicted that any slowing in spending would be temporary, given the “job creating benefits derived from government’s ambitious investment spending plans over the following three years”.