Consumer spending falters

As economic growth slowed in the first quarter of 2012, consumer expenditure figures reflected a weakening in household spending and unemployment ticked up

According to the latest SA Reserve Bank Quarterly Bulletin, household consumption expenditure slowed in line with the general slowdown in economic activity. Employment figures during the first quarter were disappointing with the rate of unemployment edging up to 25%. At the same time we saw wage settlement figures reaching 7.3% which was considerably higher than the inflation rate.

Pressure on household finances

South Africans who have jobs were able to negotiate higher nominal wage increases; those who have lost jobs or those unable to get into the formal sector of the economy are facing real financial difficulties.

It is unsustainable, even for those who have jobs, to maintain the same spending patterns because discretionary income is being squeezed from high administered prices like energy and medical costs.

Inflation eases but risks remain

There was however some good news on the inflation front: the annual rate of inflation slowed from 6.1% in April to 5.7% in May. This was partly due to an easing in food prices which more than offset an increase in the petrol price during the measured period. The slowdown in global commodity prices, in particular those of oil and food, have benefited domestic prices.

A decline of about 70c a litre in petrol prices is expected next month which will help ease pressure on consumers’ discretionary incomes. The volatility in the exchange rate of the rand poses an upside risk to inflation as rand weakness can undermine any positives that might be derived from lower global oil prices.

In recent months we have experienced rand weakness partly as a result of risk aversion associated with the turmoil in European economies. Other potential risks to inflation remain, administered prices as mentioned above.

Rate cut on the cards?

With the headline inflation dipping below the upper band of the inflation target, some debate has ensued about whether the SARB1 is going to cut rates sooner rather than later.

Our view is that the repo rate will remain unchanged at 5.5% with the prime overdraft rate at 9.00% for the remainder of 2012. The SARB should only cut rates if there is a significant decline in economic growth stemming from an economic meltdown in Europe. The SARB1 has indicated on numerous occasions that they will act immediately should conditions in the economy warrant it. At the moment there is no need to change the monetary policy stance.

Household debt improves marginally

Household debt as a percentage of household disposable income slowed from 75% in Q4 2012 to 74.7% in Q1 2012. Though the level is still high the downward trend is encouraging.

There has been some concern in the market that consumer spending remained high during the past few quarters, supported in part by a considerable rise in the use of unsecured lending. There is nothing wrong with obtaining debt to finance capital expenditure for businesses and expenditure by households on durable items like property and cars. The concern here is that the increase in unsecured credit might have been used to finance consumer goods; and that those who have taken up the debt might not be able to repay it comfortably when interest rates go up.

Savings remain weak

With July being national saving month it is interesting to note that the South Africa national saving rate as a ratio of GDP is 15.2%. This is much lower than the 20% per cent generally accepted as a minimum required for an economy to finance capital or investment expenditure. This kind of expenditure includes road construction, schools, hospitals and other infrastructure necessary for an economy to perform at an optimal level.

With a low savings rate, the country needs to attract foreign capital to help finance some of this infrastructure expenditure such as the Gauteng freeway construction and Eskom’s Medupi power station. We will continue to rely on foreign capital as long as we have a poor savings culture.

Of the savings that we have seen in Q1 2012, the household sector’s contribution is the smallest; household saving as a percentage of GDP was 1.7% compared to 1.6% in Q4 2011 and corporate saving was 15.5%.

Corporates remain cash flush

The corporate sector has large deposits with financial institutions which they are not spending as the economic and policy outlook in South Africa remains uncertain. The uncertainty was reflected in the growth in investment expenditure which was only 5.3% in Q1. The largest contributor to investment expenditure was government which is an unfortunate reversal of the trend during the economic boom when the private sector was the main contributor. It is common in an economy that during times of economic downturn the government should spend more to boost growth but it is not a trend that is sustainable in the long run.

References:

[1] The South African Reserve Bank.