By Tendani Mantshimuli, Consumer Economist, Liberty
The SA Reserve Bank Quarterly Bulletin painted a sobering picture about the state of consumers' financial wellbeing. Growth in household consumption expenditure has been steadily slowing down throughout 2012 from 4% in the beginning of 2012 to only 2.4% by year end. This is a result of the slowdown in household disposable income. Overall economic growth did not fare that well through 2012 and therefore disposable income came under pressure and slowed substantially.
Drivers of disposable income
Disposable income is a function of the growth rate of the economy. Currently South Africa is not growing sufficiently to create new jobs which means we cannot increase the number of people employed and hence the amount of disposable income.
In addition, the low rates of inflation and low company profitability means that nominal wage increases for most industries outside mining and manufacturing were moderate. Apart from income constraints, households are also experiencing pressure from high fuel and energy prices which leaves less money available to spend on other purchases.
Fuel price woes
Unfortunately the future of the petrol price is rocky as the exchange rate of the rand remains volatile with the currency touching levels last seen in 2009. This will not only be a challenge for petrol prices but for inflation of most imported goods.
Inflation fears
The initial estimates of inflation averaging just below the upper band of 6% might have to be revised upward if rand weakness persists. Inflation for February rose faster than expected increasing to 5.9%, mainly driven by higher insurance and medical costs as well as the increase in petrol prices. Food inflation has eased up over the same period which should bring some relief to consumers.
Interest rates stable
Despite concerns about a weak economy, the Reserve Bank kept interest rates unchanged at their March meeting due to the upward risks to inflation from the exchange rate, high wage demand and energy costs. It is important to note, however, that the upward risk to inflation is also not sufficient for the SARB to consider raising interest rates any time soon. Our view is that rates will remain unchanged for most of 2013.
Debt remains high
With the rate of disposable income growth being slower than the rate at which spending is slowing it means that consumers incurred more debt to finance spending. Household debt as percentage of household disposable income remained high at 75.8%. While the high debt level is a concern, consumers still have a reprieve in that debt servicing costs are set to remain low as there is limited possibility of an interest hike. The fragile growth prospects mean that the SARB will not be raising rates in the short to medium term no matter what the concern is about upward inflationary pressure.
Impact on growth
A major concern is that low consumer spending had a direct impact on growth. Household consumption expenditure in SA constitutes about 60% of GDP. Since SA households do not save much we can safely assume that a substantial portion of disposable income goes towards expenditure which means if income slows, so will spending especially as consumers are maxed out on credit and have limited opportunity to borrow. This is problematic for driving GDP growth. On the upside we might see the supply side of the economy picking up; in the latest data released by StatsSA there was a surprise uptick in manufacturing production, which if sustained will provide a welcome boost to GDP.