The zig-zag pattern emerging in retail sales growth figures points to stagnant consumer demand.

Retail sales growth declined dramatically in August, recording a -7 percent y/y declines in sales during the month (the lowest level since the record low of - 7.3 percent was recorded in April this year). This follows a recovery in retail sales growth in July to a revised -4.1 percent y/y from -6.9 percent y/y in June.

One had expected a slight decline in retail sales growth in August, following mild buoyancy in July, while South Africa hosted a number of sporting events. However, the more notable decline in retail sales indicates that there should be a deeper explanation for the current contraction.

A closer look recent retail sales growth figures, indicates a zig-zag formation in y/y figures. Retail sales have moved between -7 percent and -4 percent since April, in essence, representing an average -5.5 percent growth rate over these six months. The above indicates that consumer demand at the current moment is at a stagnant level, despite improvements in household balance sheets. Fluctuation around this average indicates that consumer demand has not yet begun to rise, delaying recovery in the sector.

One suspects that improvements in household balance sheets have been crowded out by the notable declines in employment in Q1 and Q2, keeping consumer demand at a levelled position. Reduced shopping frequency and bulk buying in order to save on household expenditure in the current recession, may be contributing to the low growth pattern.

Sectors which contributed the most to the contraction in retail sales growth in August included the clothing, footwear and textiles industry, where sales declined by -8.4 percenty/y following a -1.6 percent decline in July, and hardware, paint and glass sales, which declined by a staggering -22.5 percent y/y in the month, following a -14.8 percent decline in July. Disappointingly, sales by general dealers also declined notably in August by -3.8 percent y/y, after growth had improved significantly in July -1.4 percent.

The only improvement in sales growth was recorded in pharmaceutical, toiletries and cosmetic goods in August, which grew 5.1 percent y/y from a decline of -0.9 percent in July, likely to be tied to the seasonal change as summer approaches.

On a positive note, retail sales inflation declined notably from 10.6 percent in July to 9.7 percent in August. One anticipates further declines in retail sales inflation in months to come.

Although this may have argued for a further decline in interest rates, supported by weaker production growth figures in the mining and manufacturing sector in the month, the electricity tariff increase provides little scope for any further interest rate cuts.

August also saw the first deficit since April in the trade account, a forewarning that the rand may begin to weaken soon, which would have an inflationary effect on the economy.