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If you think everything is costing a lot more… are right!

23 February 2012 Kevin Lings, Chief Economist, STANLIB

In 2011, the South African economy achieved a growth rate of around 3%. This is slightly up from the 2.9% achieved in 2010 and way better than the decline of 1.5% we experienced during the 2009 recession. While the current economic growth rate of 3% is be

How did South Africa manage to recover from the 2009 recession?

Most of the economic growth South Africa has achieved over the past two years has been due to a rise in consumer spending. In 2009, consumer spending declined by 1.6%, but then recovered in 2010 to achieve a growth rate of 3.7%. The expansion continued in 2011, with consumer spending growing by an estimated and very impressive 4.9%. Correspondingly, consumer activity has accounted for almost 70% of the growth in South Africa’s total domestic expenditure since the end of 2009.

What caused the improvement in consumer spending during 2010 and 2011?

Over the past two years consumer income has risen significantly. This is mostly due to above inflation wage increases in both 2010 and 2011. For example, salaries have risen by in excess of 8% in each of the past two years, while consumer inflation averaged 4.6% over the same period. Crucially, households tend to spend almost all of their income – this means that any rise in household income tends to translate into an equivalent increase in household spending and not a rise in households savings. Correspondingly, the 8% increase in salaries during 2010/2011 boosted consumer activity in real terms, with the volume of consumer purchases increasing and not just the value of purchases.

Unfortunately, the growth in consumer spending over the past two years has not been accompanied but a significant rise in employment. A rise in employment has the advantage of expanding the consumer base, thereby strengthening and broadening the economic recovery. More positively, there is some evidence to suggest that South Africa’s labour market has at least stabilised, after shedding more than a million jobs during the 2009 recession. In addition, parts of the private sector are starting to slowly create additional employment opportunities.

What is the outlook for consumer spending in 2012?

Unfortunately, recent economic data suggests that the South African economy is likely to lose some momentum in 2012. This loss of momentum is partly due tothe ongoing economic weakness in the Euro-area, but it also reflects the damaging effects of rising domestic inflation, and hence an erosion of purchasing power within the household sector.

South Africa’s inflation rate has risen steadily from a low of almost 3% in the third quarter of 2010 to over 6 percent in early 2012; and is expected to rise further in the coming months. The increase in inflation has been driven by a combination of higher food, fuel and electricity prices. All three of these components has seen price increases well in excess of 10%, with further hikes likely in the coming months.

Unfortunately, households cannot avoid these increases, as they relate to necessities or essential services, forcing consumers to either increasingly cut-back on non-essential purchases or take on additional debt. While the rate of growth in total consumer debt remains relatively subdued, and the ratio of household debt to disposable income has moderated meaningfully in the past two years, there has been a noticeable increase in the use of unsecured credit. In fact, over the past year, unsecured credit (mostly in the form of personal loans) has risen by an alarming 33%. This suggests that increasingly consumers are starting to use short-term debt to partially offset the loss of discretionary spending power. Sustaining consumer spending based on credit is far from ideal.

What is the solution?

It is extremely clear that South Africa is in urgent need of job creation. The official unemployment rate has dropped from 25 percent in the third quarter of 2011 to 23.9 percent in final quarter of 2011. While this is a very welcome decline, the rate of unemployment remains extremely high by both historical as well as global standards. If we include the people who would like to work, but have stopped looking, (discouraged workers), then the unemployment rate jumps to 35.4 percent. A very significant portion of South Africa’s unemployed population is young people. For example, the unemployment rate among people aged 18 to 24 is officially over 45 percent. The situation is aggravated by the fact that a significant portion of the unemployed youth have not completed their school education or have been unable to develop any technical skills.

Job creation is not merely a function of the level of interest rates or the value of the exchange rate. While low interest rates and a competitive exchange rate are necessary conditions for sustained economic success in South Africa, they are not sufficient conditions. Rather, a range of policy initiatives are crucial in facilitating job creation. These include labour policy, education and skills development, competition policy (deregulation), industrial policy, and trade policy. Reducing South Africa’s high level of unemployment requires a comprehensive policy solution that puts the role of the private sector, especially private sector fixed investment, firmly at its core. Fortunately, the corporate sector is in excellent financial shape, with a record high level of savings. In addition, recent government comments and initiatives suggest that the authorities are becoming increasingly focused and determined to help reduce the high level of unemployment. This includes the expansion of infrastructural development, especially rail and port capacity through Transnet. An enhanced and expanded transport infrastructure, together with further progress in the alleviation of electricity supply constraints, should encourage a broadening and strengthening of private sector fixed investment activity, off a relatively low base.

Kevin Lings

Chief Economist


February 2012

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