ONLINE ANNUAL REPORT 2010

THE ECONOMY OVER THE YEAR TO JUNE 2010

This report provides a brief summary of the key economic trends and developments that formed the backdrop to the Group’s 2010 financial year. All information has been extracted from reports from the Stellenbosch Bureau for Economic Research which, in turn, relies on data released by StatsSA.

LOOKING BACK

The South African economy emerged from recession during Massmart’s June 2010 financial year. Growth in national Gross Domestic Product (GDP) turned positive in the third quarter of the 2009 calendar year (being the first quarter of the 2010 financial year). The much-anticipated recovery in overall consumer spending was however, delayed and so only recorded positive growth in the first quarter of 2010 (the third quarter of the Group’s 2010 financial year), after declining during the whole of the 2009 calendar year. This positive domestic economic news flowed from the declining South African interest rate environment and the gradual recovery of the global economy, albeit that the latter is still beset with much uncertainty.

The South African Reserve Bank (SARB), which follows an inflation-targeting methodology that influences monetary policy, has steadily lowered commercial interest rates since December 2008 as consumer inflation began to decline. From that date, interest rates have dropped by a cumulative 550bps to March 2010 (now 600bps following a further 50bps drop in September 2010).

South African consumer inflation, measured as Consumer Price Inflation (CPI), has been on a downward trajectory and was 4.2% at the June 2010 financial year-end, and was still lower in July 2010 (3.7%). This improvement has largely been caused by the continued Rand strength.

As shown in the graph below, South African national real retail sales growth declined steadily from June 2006 following the first interest rate increases. This declining growth turned negative in May 2008 and remained negative for most of 2009. The first positive national real retail sales growth was reported in January 2010 and this has recorded positive growth since then.

LOOKING AHEAD

Although there remains some uncertainty about the sustainability and longevity of the global economic recovery, the 2011 South African economic outlook for consumer spending appears benign, positively influenced by the likelihood of low inflation, low interest rates, steady rates of employment and firmer house prices for the period to June 2011.

National inflation (CPI) is forecast to average 4.6% for the 2010 calendar year and 5.5% for 2011. Consequently, interest rates may only increase for the first time in the third quarter of 2011 – suggesting that there may be steady and low interest rates for the Group’s June 2011 financial year, which will be positive for consumer spending on general merchandise and home improvement products.

Growth in real final household consumption expenditure is forecast to recover from a low of -3.1% in 2009 (calendar year), to 2.5% in 2010 and 3.6% in 2011.


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