Recession averted but consumers still wary
SA may just have avoided a technical recession, despite the weaker than expected performance of the retail and manufacturing sectors, but consumers are still under strain.
A technical recession is based on two consecutive quarters of negative growth. With a contraction of 0.3% in GDP growth last quarter, a contraction in the first quarter of 2017 would place SA in a technical recession. The general consensus is that economic growth has slowed but it is likely SA has avoided a recession.
Contractions in the retail and manufacturing sectors of 1.1% and 0.9% respectively will weigh on the first quarter’s GDP but economists say that stronger activity in the mining (up 3.5%) and agricultural sectors (food prices were down 2.1% in April) outweighed the drags.
“We expect to have cleanly escaped a technical recession in the first quarter of this year,” says Standard Bank economist Thanda Sithole.
The mining sector is expected to continue to benefit from higher commodity prices and favourable global conditions while the agricultural sector will benefit from base effects and improved weather conditions.
Retail sector, which makes up 40% of total household spending and just more than 6% of GDP, will remain weak throughout 2017 due to constrained domestic consumers.
Sithole says weakened consumer confidence, tighter financial conditions, subdued growth in employment and real disposable income are expected to weigh on retail sales growth and by implication private consumption expenditure growth.
Most economists say SA just escaped a spiral into recession in the first quarter. Investec economist Kamilla Kaplan forecasts 0.8% GDP growth while FNB estimates it will be 0% for the first quarter of 2017.
“We’ve just made it and very narrowly missed a recession,” says FNB senior economic analyst Jason Muscat. “Consumers are slightly better off than last year but it’s not translating to spending because there’s been a shock to confidence following the Cabinet reshuffle and credit ratings downgrade. The majority of South Africans are also paying more tax — whether through fuel levies, the imposed fiscal drag or the additional higher income tax bracket.”
Salaries rose for the second consecutive month in April by 1.1%, according to the monthly BankservAfrica Disposable Salary index. Inflation has continued to fall, dropping to 5.3% year on year in April.
Economists.co.za chief economist Mike Schüssler says consumers went through a hard time in 2016. “People went out to eat less, there were fewer new cars on the road, less domestic tourism and retail sales declined. Confidence is still very low and consumers are fearful.”
SA’s private sector credit growth has also continued to moderate over the past few months, indicating a strain on the economy. According to the Reserve Bank, growth in extension of credit to the private sector — consumers and business — slowed to an annualised 4.95% in March. Credit extension is at a 39-month low.
Financial conditions are expected to remain tight in 2017 partly because of lower household credit lending. Standard Bank expects private consumption expenditure growth to contract 0.4% in 2017 from positive growth of 0.8% in 2016.
“The downgrade has knocked confidence and consumers are concerned about more credit and more debt,” says Schüssler.
Interest rates have also remained high and the Reserve Bank’s monetary policy committee is not expected to cut rates on Thursday. Consumer spending is not expected to bounce back for six to nine months after a rate cut.
Argon Asset Management economist Thabi Leoka says: “Growth will be feeble and we are likely to flirt with a recession this year. Consumers are still constrained, reflected in retail sales and vehicle sales. We’re seeing some retailers, especially international retailers, close and it’s reflective of a poor market,”
International retailers Mango and Nine West closed their stores in March while River Island will exit SA in June. The retail sector is set to retrench workers soon.
The property sector is also taking a knock. TPN Credit Bureau says that only two-thirds of tenants pay their full rent and utilities bills each month, while buildings are only being constructed in upper market business hubs.
THE DOWNGRADE HAS KNOCKED CONFIDENCE AND CONSUMERS ARE CONCERNED ABOUT MORE DEBT