Household spending a promising sign for SA
Soaring fuel price and shocking GDP data do not tell whole story of economy
● South Africans are enduring one of the harshest economic periods in decades, but taking stock of their situation, many cut debt last year and are now in a stronger position to spend, promising a boost in economic growth in the months ahead.
Even so, a record petrol price hike, a 2.2% contraction in GDP in the first quarter – the most since the 2009 recession — coupled with a rise in VAT and sharp increases in administered prices has sent some economists back to the drawing board to revise their growth forecasts.
However, that may be premature. Although household consumption expenditure decelerated by 1.5% in the first quarter — in line with a slowdown in retail trade sales over the period after steady growth last year — there are signs that the economy could be poised to take off.
Razia Khan, Standard Chartered chief economist for Africa and the Middle East, said this week during the Johannesburg leg of her South Africa roadshow: “Something fundamental shifted in the household sector last year.”
This preceded the political change and “Ramaphoria” that boosted business and consumer confidence in the first three months of this year after Cyril Ramaphosa was appointed president in February.
Last year household consumption expenditure rose in the second quarter, dipping only slightly in the third quarter.
Spending surged again in the fourth quarter, boosted by Black Friday discounted sales in November. This suggests that the slowdown in household spending in the first quarter may be a temporary pullback.
Borrowing is also on the increase, which could be a sign of growing confidence.
According to Reserve Bank data, households and businesses borrowed more in December, contrary to economists’ expectations that borrowing would slow down. Private sector credit extension grew by 6.72% to R3.5-trillion in December from 6.48% in November.
However, most of this growth was due to a lift in investments.
In the first quarter of this year, households spent the most on furnishings, household equipment, miscellaneous goods and services, communication, and restaurants and hotels.
The upswing in consumer spending is already showing elsewhere.
Apparel retailer Mr Price Group communicated an optimistic outlook after publishing strong annual results last week, although it added that it remained cautious as structural challenges continued to dog the economy despite “vastly improved business and consumer confidence”.
Greenshoots of recovery
Last year’s tough economic climate spurred many households to begin lessening their debt positions and by mid-2017 they were in better shape.
The “greenshoots” of recovery were deeply embedded as early as last year and opportunities for a turnaround in mining and manufacturing were plausible. With supplyside reforms, sustainable growth was achievable. “The message here is don’t spend too long looking in the rear-view mirror,” Khan said.
Dennis Dykes, chief economist at Nedbank, said consumer spending probably would be the better performer, but Nedbank didn’t expect it to “shoot the lights out”.
An improvement in credit conditions could also help.
“Even though household debt remains fairly high, the banks are loosening some of their credit criteria. That could help spending if confidence remains,” Dykes said.
But employment was also key to propping up consumer confidence, and strong employment growth was not expected this year as employers were adopting a wait-and-see approach to the economy.
“You’re probably looking at the early half of next year before you see real strength coming through,” Dykes said. “Probably really only 2020 before you start seeing it move towards proper economic potential — above 2.5%, hopefully above 3%.”
Strong consumer spending, though, is not necessarily the answer to South Africa’s anaemic growth. Khan said in the event consumer spending boosted growth in the short term, this would be demand-led growth that was unsustainable and would lead to a higher current account deficit as imports rose. The solution was in supply-side reforms.
Reforms in the telecommunications industry and eliminating market competition barriers could boost economic growth by at least another percentage point, she said.
The respite for consumers may still be some way off in spite of low inflation.
The Reserve Bank is unlikely to cut interest rates further given global conditions and the risk to inflation that rising international oil prices pose. For many South Africans there is still the constant pressure of electricity, water and fuel prices that keep rising well above inflation, reaching a point for some consumers where such necessities are just no longer affordable, according to the South African Labour Market Monitor and Income and Expenditure Patterns report by Andrew Levy Employment.