DEBT PUTS limit ON RETAIL SALES

RETAIL sales disappointed in October as debt-ridden consumers remained under pressure, but a tentative recovery in factory output pointed to positive economic growth next year.

RETAIL sales disappointed in October as debt-ridden consumers remained under pressure, but a tentative recovery in factory output pointed to positive economic growth next year.

Africa's biggest economy grew by an annualised 0,9percent in the third quarter of this year after three consecutive quarters of contraction, but demand is still depressed after nearly one million jobs were lost during the nine months, while previous interest rate increases still weigh.

Stats SA said yesterday retail sales fell by 6,5percent year-on-year in October at constant prices, compared with a revised 4,9percent decline in September.

The agency also said manufacturing output shrunk by an annual 9,3percent in the same month, improving from September's 11,4percent year-on-year contraction as the global economy emerges from its downturn.

Economists polled by Reuters had forecast a 6,2percent year-on-year fall in retail sales for October while factory output was seen shrinking by 10,6percent.

"Manufacturing was much stronger than expected," said Peter Attard Montalto, emerging markets economist at Nomura International.

"Retail by contrast was worse than expected partly on base effects and with unemployment taking a larger-than-expected hit despite still robust household credit growth."

Consumers are still feeling the pinch of interest rate increases in the two years to June 2008 aimed at taming inflation, though the Reserve Bank totally unwound them between December 2008 and August to help the struggling economy.

The bank has however left rates steady at its last three policy meetings, partly citing concerns that anticipated higher electricity tariffs will feed price pressures.

Latest figures from the Bureau for Economic Research yesterday showed CPI inflation is seen averaging 7,5percent next year, suggesting it will again breach the central bank's 3-6percent target band.

CPI fell back into the target zone in October, the first time since April 2007, but this is seen as temporary.

October manufacturing production was in line with the trend in the purchasing managers' index survey, which saw the index rise to close to the key 50 break-even mark in that month. It increased further to 50,3 points in November.

With manufacturing benefiting from a global economic recovery, coupled with inflation concerns, domestic interest rates are likely to remain flat for most of 2010.

"The [rate] next move is likely to be up but not until well into 2010, probably around the fourth quarter," said Absa Capital macro strategist Jeffrey Schultz. - Reuters

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