CONSUMER SPENDING: Expect solid but
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.