Online Annual Report 2009



Change in quarterly household consumption expenditure from January 2008


Monthly national retail sales growth constant prices from July 2006


Quarterly averages prime interest rate and headline inflation CPI from January 2008

The economy over the year to June 2009

This report provides a brief summary of the key economic trends and developments that provided the economic backdrop to the Group’s 2009 financial year. All data has been extracted from the Stellenbosch Bureau for Economic Research reports.

Looking back

In the 2008 calendar year South Africa was experiencing the traditional economic patterns associated with a tightening interest rate cycle. The South African Reserve Bank (SARB), which follows an inflation-targeting methodology that influences monetary policy, had steadily raised commercial interest rates as national inflation rose above target levels. As a result, growth in household consumption was slowing as were retail sales. Then in December 2008, with inflation beginning to decline, the SARB began reducing interest rates on a gradual basis.

The adverse effects of the October 2008 global economic crisis crashed into the South African economy in the first quarter of 2009 when the country’s GDP contracted by 6.4%. Associated with this was a rapid decline in equity and house prices, severe currency weakness, job losses in the commodity and construction sectors and large-scale uncertainty. These adverse developments delayed the recovery in South African household consumption that might have been anticipated following the SARB’s steady loosening of commercial interest rates.

The dramatic impact of weak global demand on the South African economy was highlighted by the 55% decline in the first quarter’s exports. Together with this was the weak domestic household consumption which caused the sharp growth contraction.

South African retail sales growth began declining following the first interest rate increase in June 2006. Since then retail sales growth has declined steadily and has been negative for most of 2009.

Looking ahead

Although commercial interest rates have declined by 500 points (to June 2009) since December 2008 and fiscal policy is expansionary, South African consumers appear to still be feeling the lagged impact of cumulative 500 points interest rate increases between June 2006 and June 2008. Compounding this has been the reluctance by the banks to increase lending to individuals and households, although at least three of the four major domestic banks recently announced an increase in risk appetite and therefore lending. Household consumption, particularly the discretionary portion, may take longer to recover than anticipated due to these two effects together with job losses and negative wealth effects from falling house prices.

Although changes in household consumption are influenced by several factors some of which are noted above, one of the main drivers is commercial interest rates. Given the SARB inflation-targeting approach, any future declines in interest rates will be linked to sustainable reductions in headline inflation (CPI). The recent strength of the Rand – now at R7.40 per US Dollar after being above R10,00 per US Dollar earlier in the year – should feed through into lower inflation as will the lower international oil price. Much of this has however, already fed into the current CPI levels (CPI was 6.4% as at August 2009).

In the short term, the South African economy is unlikely to receive any external impetus from the sluggish global economy. South African household consumption will probably increase gradually as consumer confidence returns, asset prices stabilise and banks relax their lending criteria. Adding positively to this will be consumers’ additional disposable income from the lower interest rates and from recent real salary and wage increases. The 2010 Soccer World Cup will certainly boost employment and consumer spending, although Massmart’s Divisions will only be an indirect beneficiary of this.