CON­SUMER SPEND­ING: Ex­pect solid but

Finweek English Edition - - COLUMN - GRETA STEYN

Peo­ple with jobs were able to spend a lot, over­shad­ow­ing the fact that mil­lions of peo­ple are with­out jobs

REAL HOUSE­HOLD con­sump­tion ex­pen­di­ture growth was the main driver be­hind the in­crease of 4,4% in gross do­mes­tic prod­uct in fourth quar­ter 2010. Is con­sumer spend­ing sus­tain­able and will it reach the same growth lev­els as seen in the boom? Con­sumer spend­ing rose 5,1% over the fourth quar­ter, far out­strip­ping the over­all rise in gross do­mes­tic ex­pen­di­ture of 1,2%. (All fig­ures are quar­ter-on-quar­ter, sea­son­ally ad­justed and an­nu­alised per­cent­age changes, un­less other­wise stated.)

Though the growth rate in con­sumer spend­ing was ro­bust, it was nonethe­less down on the 5,7% rate recorded over the third quar­ter, which sug­gests even if con­sumer spend­ing were to boom again, in­creases in the growth rate aren’t go­ing to hap­pen in a straight line.

One of the main rea­sons for the high growth in con­sumer spend­ing last year was the big in­creases in real dis­pos­able in­come. This growth rate was 5,3% over the fourth quar­ter, still high af­ter 5,5% in the third. The rea­son why this rate of in­crease has been so high is that in­fla­tion came down at a time when com­pen­sa­tion grew strongly. De­spite the high un­em­ploy­ment rate, wages and salaries grew at a rapid rate, far out­pac­ing in­fla­tion, which means peo­ple with jobs were able to spend a lot, over­shad­ow­ing the fact that mil­lions of peo­ple are with­out jobs.

An­other fac­tor con­tribut­ing to the strong in­crease in con­sumer spend­ing is low in­ter­est rates. In­ter­est rates have been cut by 6,5 per­cent­age points from the peak reached in the pre­vi­ous cy­cle. The Re­serve Bank’s lat­est Quar­terly Bul­letin re­ports sus­tained low lev­els of in­ter­est rates re­sulted in a fur­ther de­crease in the ra­tio of debt ser­vice costs to dis­pos­able in­come of the house­hold sec­tor, from 7,8% in third quar­ter 2010 to 7,2% over the fourth quar­ter.

The de­cline in the growth rate of con­sumer spend­ing in the fourth quar­ter partly re­flected a fall in the rate of in­crease in spend­ing on durable goods. Af­ter brisk in­creases, plus a 13,4% real rate of in­crease over the third quar­ter, this cat­e­gory of spend­ing rose at a rate of 6,9%. There was a con­trac­tion in spend­ing on fur­ni­ture and house­hold ap­pli­ances, along­side slower growth in buy­ing cars, bakkies and mo­tor­cy­cles. The con­trac­tion in de­mand for fur­ni­ture and house­hold ap­pli­ances could be as­cribed to de­mand for those prod­ucts run­ning out of steam af­ter a pe­riod of el­e­vated spend­ing in the four pre­ced­ing quar­ters.

So con­sumer spend­ing in fourth quar­ter 2010 was strong but didn’t shoot the lights out. What’s the out­look? A clue can be found in the Bu­reau for Eco­nomic Re­search’s (BER) re­tail­ers’ con­fi­dence in­dex. The in­dex is com­piled by con­duct­ing a sur­vey of re­tail­ers, ask­ing them if they’re sat­is­fied with pre­vail­ing busi­ness con­di­tions. The per­cent­age of re­tail­ers re­port­ing they were sat­is­fied with pre­vail­ing busi­ness con­di­tions de­clined slightly from a three-year high of 63 to 58 in first quar­ter 2011. There­fore, re­tail­ers are slightly less con­fi­dent.

How­ever, the re­tail sur­vey re­vealed a notable im­prove­ment in busi­ness con­di­tions in the re­tail sec­tor over the first quar­ter of this year. Whereas a net ma­jor­ity of 2% of re­spon­dents to the BER’s re­tail sur­vey re­ported busi­ness con­di­tions had still de­te­ri­o­rated in the re­tail sec­tor over fourth quar­ter 2010, 10% net re­ported an im­prove­ment in busi­ness con­di­tions dur­ing first quar­ter 2011.

Ac­tual re­tail spend­ing for Jan­uary was still ro­bust, but be­low mar­ket ex­pec­ta­tions. The BER said dur­ing 2010, fac­tors such as ex­cep­tion­ally high real wage in­creases, low in­ter­est rates, a strong rand, pent-up de­mand and high con­sumer con­fi­dence saw a bet­ter than ex­pected bounce back in re­tail sales vol­umes. “Given our pro­jec­tion of lower real wage in­creases, in­creas­ing food and fuel prices and no fur­ther in­ter­est rate cuts, as well as last year’s high base, we ex­pect the growth in re­tail sales vol­umes to ease some­what dur­ing 2011,” the BER said.

Con­sumer spend­ing growth will re­main strong this year, but noth­ing like the boom times of 2005 and 2006.


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