Slowing South Africa retail sales ease inflation worries.

In June 2006, the South African Reserve Bank (SARB) was confronted by a consumer spending surge that threatened to destabilize the SARB's sound management of the country's inflation. Between June 2006 and February 2007, the SARB raised interest rates 200 basis points (2.0 percent). The SARB is South Africa's central bank.

The above graph showing month-to-month changes in retail sales (year-on-year) rate of growth chronicles the result of the SARB's aggressive actions. Obviously consumer spending built up substantial inertia so it took three months-from June 2006 to September 2006-for the tightening to take hold. And even then it took additional rate hikes for the SARB to fully assert control over inflation.

During the second week in April 2007, the SARB left interest rates unchanged, apparently feeling that its tightening measures had done their work.

Among the stimuli that supported South Africa's consumer spending surge was the availability of consumer credit-with many new borrowers entering the market. An April 16, 2007 story in Business Day (Johannesburg) said that South African consumer confidence was at a 25 year high. The newspaper passed along the opinion of Efficient Research, a local market research firm, that consumers were reducing their borrowing. The firm said that this meant the interest rate hikes were having the desired effect.

Even so, Business Day said, "Expectations are that retail sales should continue to slow down until the end of this year as the lower credit demand feeds through to lower consumer spending." Again citing the Efficient Research report, the newspaper said that three specific types of outlets were likely to show the most pronounced slowing. They are: Textiles, household goods, and general retailers.

The newspaper provided additional detail from Efficient Research. "The report said motor vehicle finance had seen the largest slowdown in the credit extension data, with a slowdown being experienced in the motor trade industry as well."

Business Day also mentioned a report by the international investment banking and asset management group Investec, which said that growth of the South African economy was likely to be "robust."

In 2005, South Africa's economy expanded 5.1 percent, the most in over at least a decade. In 2006, South Africa grew another 5.0 percent and, according to the International Monetary Fund (IMF) will grow 4.7 percent in 2007, and 4.5 percent in 2008.

South Africa's construction sector is partly responsible for the country's solid growth figures as well. The impact of higher interest rates was felt in slowng residential construction, particularly private homes, but general building construction has remained strong.

A separate Business Day story, published on April 19, 2007, quoted a prominent labor leader who pointed to the country's trade deficit as an indication that, "The country, was living beyond its means," which could hurt future growth.

A local bank economist was quoted in the same Business Day story as presenting the idea that because durable goods sales were slowing the SARB might be satisfied enough to keep interest rates where they are. Lower durable goods sales might also be an indication that the labor leader's prediction might be correct.

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