Consumers tighten belts

THE South African economy has a long history of the tertiary sector (consumption side) being a resilient pillar of growth, but this long, unbroken run was shattered with the release of the GDP figures for the first quarter of the year.

The numbers showed that the sector contracted by a full 2% quarteron-quarter.

The collapse was the result of every industry in the sector shrinking, but the most notable figure was the 5.9% collapse in the retail and wholesale trade sector.

Household consumption expenditure dived 2.3% quarter-on-quarter, with spend falling significantly on food and nonalcoholic beverages (-3.4%), alcoholic beverages and tobacco (-7.4%), clothing (-12.1%), recreation (-8.5%), and restaurants and hotels (-8.6%).

It’s clear that South Africans are cutting back dramatically in these difficult times.

To find a comparable period in the history of the tertiary sector’s performance, we have to go back three decades, to the mid-80s, when the sector contracted by more than 3% for three quarters.

It was a period which, like now, was characterised by a contraction in every industry in the tertiary sector, plunging consumer confidence, precipitous falls in the trade sector and recession.

The difference between now and then is that during the 80s, both inflation and interest rates were north of 20%; this time the inflation profile is within the South African Reserve Bank’s target band and trending lower, and interest rates remain accommodative.

Why, then, has the modest relief of falling inflation and low interest rates not translated into some boost for the consumer? The key is confidence. Consumers continue to defer purchases until sentiment changes, while also running down household debt.

In the five years before the recession of the 80s, the proportion of household debt to disposable income rose from about 35% to 55%.

In 2017, household debt levels are much higher, but the consumer response of today appears to be similar to that of 30 years ago.

After the rapid rise in household debt (to near 90% of disposable income) in 2008, households have been de-gearing, with the current level standing at 73.4%.

● Nxedlana is FNB’s chief economist. — TMG