The Economy Ė A Backward Glance

At the beginning of the June 2007 financial year the South African economic environment was positive but latterly, as interest rates were tightened, it became benign at best and began to adversely affect consumer confidence and spending.

During the financial year to June 2007, the Rand/US Dollar exchange rate averaged R7,22, with a high of R7,92 and a low of R6,74. This was weaker than the R6,42 average for the June 2006 financial year but the feed-through effect into South African inflation was muted.

Consumer inflation, measured by CPIX (being inflation excluding interest), averaged 5,4% for the financial year, with a low of 4,9% in February and a high of 6,4% in June. Within this measure, average national Food inflation was higher at 8,2%. The higher Food inflation was primarily caused by supply-side constraints, particularly in commodities. Other significant contributors to CPIX were Services and Fuel & Energy costs which averaged 5,0% and 9,2% respectively.

Given the South African Reserve Bankís inflation-targeting mechanism, this higher inflation resulted in five interest rate increases totalling 2,5%. The first of these was in August 2006 and the last in August 2007. Interest rates increased 2.0% during Massmartís 2007 financial year.

The higher interest rates did not, initially, affect South African consumer spending as measured by Personal Consumption Expenditure (PCE). Growth in PCE was reported at 7,6% quarter-on-quarter annualised in the third quarter of the 2006 calendar year but had declined to 5,5% by the second quarter of the 2007 calendar year.

With this economic backdrop, South African consumer confidence as measured by the Stellenbosch Bureau of Economic Research peaked in the first quarter of 2007 but had eased in the second quarter.

The broad effects of the above on the Group were twofold: the higher Food inflation increased nominal sales in the Groupís wholesale food businesses while the tightening interest rate environment slowed the sales of General Merchandise in Game.

Our thanks to Mr. Michael Biggs, Deutsche Bankís South African economist, for his assistance with this note.