Rand weakens after retail sales fall more than the market expected

Retail data showed South Africa’s household finances came under increased pressure in the second quarter of this year as individuals reported that their savings, incomes and ability to service debt deteriorated. Picture: Supplied

Retail data showed South Africa’s household finances came under increased pressure in the second quarter of this year as individuals reported that their savings, incomes and ability to service debt deteriorated. Picture: Supplied

Published Aug 18, 2022

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Signs are not promising for gross domestic product (GDP) growth after June’s retail sales data contracted substantially worse than markets expected, which led the rand to weaken against the dollar.

Annabel Bishop, the chief economist at Investec, said, “The retail sales outcome is negative for South Africa’s gross domestic product outlook for 2022 and so for the rand.”

Statistics South Africa said yesterday retail sales fell 2.5 percent year on year in June after rising by 0.1 percent in May.

The slide in annual volume sales was largely driven by hardware material sales, with volumes declining by 8.6 percent year on year (y/y) in June, worse than the 7.1 percent y/y recorded in May in line with the waning home-improvement drive.

Support for retail sales came from clothing and footwear, which increased by 5.3 percent y/y, as well as food and beverages which rose by 3.9 percent y/y.

Bishop said the data showed South Africa’s household finances came under increased pressure in the second quarter of this year as individuals reported that their savings, incomes and ability to service debt deteriorated.

“Rising inflation reduces real incomes, in turn reducing the purchasing power of consumers without a concomitant rise in salaries and wages. Higher interest rates and falling real disposable incomes suppress consumer expenditure, with consumer confidence in the second quarter of 2022 at the worst reading in over three decades, excluding the second quarter of 2020 when the extremely harsh lockdown restrictions were imposed,” she said.

Siphamandla Mkhwanazi, a FNB senior economist, said, “The loss of momentum in monthly volume sales is consistent with mounting pressure on consumer discretionary incomes, due to rising interest rates and a higher cost of living.

“Overall, this outcome gives further credence to our expectation that GDP shrunk in second quarter 2022 compared to the first quarter 2022, weighed on by slower global growth and a myriad of domestic challenges, including the more intense bouts of load shedding,” he said.

By 5pm the rand was at R16.67 per dollar, 24 cents weaker to the dollar from the same time the previous day.

Bishop said the key driver for the rand yesterday was international events as investors waited on hawkish minutes from the Federal Reserve's July meeting.

She said she did not think the rand reacted to South African members of Parliament, who yesterday sought answers from the South African Reserve Bank about its investigation into President Cyril Ramaphosa’s alleged missing US dollars that were stolen at his Phala Phala game farm.

She said the market would only react if there was any material wrongdoing actually proved to have occurred.

Looking ahead, Bishop said, “The rand is expected to see strength into, and over quarter four 2022, but risks remain. However, the risk is tilted towards slower economic growth this year, particularly in quarter four 2022 and fist-half 2023, and this could see the rand not make as markedly substantial gains as it usually does in the first and last quarters of the year on seasonal influences.”

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