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GDP uptick a hint to consumers to pay off debt, says Imara

23 March 2010 Imara Asset Management

The latest good news on the economy is a big hint to consumers to pay off debt while they can, according to market-watchers at Imara Asset Management, South Africa.

Consumers might have an eight-month window of opportunity. After that the cost of living with debt could move higher, says Lara Warburton, managing director of Imara’s South African asset management business.

Recently published GDP figures for the fourth quarter of last year showed growth of 3.2%, surprising on the upside.

Warburton notes: “Officials rarely put economic data into a consumer-friendly context. However, the hidden subtext to the latest GDP numbers is that households should make a big effort to pay down debt because the next movement in interest rates could be up.

“The market expected growth of about 2.6%. The official figure is much higher and immediately brought an end to speculation that we might see one more cut in rates.

“The Monetary Policy Committee has kept the repo rate steady at 7% for several months. Already economists have started to debate the case for a rate rise. The current Imara view is that rates could start to move higher about November. Consumers paying higher electricity and food bills may have little room for manoeuvre, but if possible they should pay down debt while the going is good.”

The concern is that consumer debt remains at elevated levels even though banks have cut the rate of credit extension. Statistics at the January meeting of the Reserve Bank’s Monetary Policy Committee showed that household debt as a ratio of disposable income fell from 80.1% in the second quarter of 2009 to 79% in the third quarter.

“This is a step in the right direction,” says Warburton, “but consumer debt remains relatively high. It would be a pity if the feel-good effect created by the World Cup and better economic data caused consumers to drop their guard and engage in frivolous spending.

“Historically low interest rates may create the impression that your debt is under control, but when rates turn the burden can rapidly become unmanageable.

“Our tip to consumers is ‘Don’t get caught out a second time – run down debt as a matter of urgency’.”

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