Retail sales maintained its weakening bias in January, contracting by a notable -2.3% y/y after rising 1.0% in December. While the contraction is partly due to base effects, high inflation, weak household credit extension and the lag effect from the interest rate hike last year, also explain the weakening trend in retail sales.

There was a broad-based slowdown – with the exception of pharmaceuticals and medical goods, cosmetics and toiletries which rose 3.6% y/y from 2.0% in December- in retails sales. The biggest detractors were general dealers which reported annual negative growth rate of -2.8% y/y, textile and clothing (-5.3% y/y), household furniture and appliances (-3.4% y/y) as well as other retailers (-4.3% y/y). Sales for food, beverages and tobacco grew by a mere 0.3% y/y from 6.3% in December. The drop in food inflation should result in an improvement in food sales in the months ahead.

While we expect growth in consumer spending to improve in the year ahead, supported by falling inflation, tax increases will definitely limit the rate of increase. Furthermore, weak consumer confidence, household credit demand and high unemployment will contain household expenditure growth during the first half of 2017.