April 12, 2017 / 1:45 PM / 4 months ago

UPDATE 1-South Africa's retail sales fall, interest rate cuts unlikely

3 Min Read

(Adds market reaction, comment, background)

JOHANNESBURG, April 12 (Reuters) - South African retail sales slumped for a second consecutive month in February, data showed on Wednesday, as cash-strapped consumers cut back on large purchases in an economy on the brink of a recession.

S&P Global Ratings and Fitch last week downgraded South Africa's credit to junk, rattling financial markets, after President Jacob Zuma removed a respected finance minister from the cabinet. The fallout could push economic growth to a second straight contraction, the standard definition of recession.

Weak growth has also been fuelled by steep falls in consumer and business confidence and made worse by higher inflation stoked by the falling currency, squeezing consumer spending.

Statistics South Africa said retail sales fell by 1.7 percent year-on-year in February after a 2.3 percent contraction in January, with general retailers, particularly clothing and furniture sellers recording diminished activity.

"The downgrade of the credit rating is going to put downward pressure on the rand and inflation," said Nedbank economist Johannes Khosa. "As a result, we might see an increase in interest rates. The cost of living is also expected to increase and that is going to be negative for consumer spending."

In response to the political uncertainty and the downgrades the rand has fallen about 12 percent since late March, wiping away the chances of rate cut by the central bank that would have relieved pressure on consumers and kick-started a recovery.

A Reuters poll on Wednesday found that interest rates are likely to remain on hold until 2020 at least, although the central bank had declared in January that it had reached the end of a tightening cycle that began in 2014.

Growth shrunk 0.3 percent in the final quarter of 2016 and a second consecutive contraction in the first quarter of 2017 could see the continent's most industrialised economy slip into technical recession for the first time since the 2008-2009 global crisis. First quarter growth data is due in early June.

S&P and Fitch cited likely changes in economic policy after former finance minister Pravin Gordhan was fired in the cabinet reshuffle, a move that has rattled markets and sparked opposition protests against Zuma. (Reporting by Olwethu Boso and Mfuneko Toyana; Editing by James Macharia)

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