Tough times ahead for consumers
The National Association of Automobile Manufacturers of SA (Naamsa) released details of January 2008 vehicle sales earlier this week. And the numbers confirm that South Africans are reeling under the financial strain imposed by higher interest rates and spiralling inflation. Household disposable income is on the decline, meaning luxury and unnecessary purchases have to be put on hold.
Economists often look at passenger vehicle sales as a leading indicator of trouble in the domestic economy. Hiccups in vehicle sales soon infect the housing market, before moving down the chain to more affordable durable goods. Food, medicines and other essentials are the last goods categories to suffer.
Passenger vehicle sales plummet
If we examine the latest numbers we can confirm that the motor vehicle industry is struggling. Total vehicle sales in January 2008 were 9.4% lower than the same period last year – and this follows a 19% drop in December 2007. The slowing trend is more severe in the passenger vehicle category. Only 30 483 cars were sold in January 2008, 14.6% down on the previous year.
Despite the passenger vehicle slowdown, there is still robust demand in the commercial vehicle and truck categories. Naamsa reports that sales of medium commercial vehicles rose 27% to 1 114 vehicles and sales of heavy trucks and buses improved 14% in the period. This indicates there is still life in the small business sector; but is not necessarily good news for consumers.
The corporate sector evaluates their vehicle purchases with a different set of criteria. Affordability is of a lesser concern than continued operation. They simply compensate for the greater expense in financing and maintaining their fleets by raising the prices of their goods and services!
Rand weakness not helping
The main reason offered for the decline in passenger vehicle sales is that of affordability. As mentioned earlier, household disposable income has been severely curtailed by higher interest rates. And despite the Reserve Bank’s best efforts price inflation shows little sign of slowing down. We have frequently talked about the impact of rising food and fuel prices on the domestic economy. To summarise: higher prices drive inflation and increase the likelihood of further interest rate hikes.
But there is another threat which looks set to make its appearance – a weaker rand. The local currency has lulled us into a sense of security in recent months. It has traded in a narrow range against the dollar for so long now that you can be excused for forgetting how volatile it can be. Recent developments on international markets have seen the rand weaken to around 770c to the dollar and more than R15 to the pound again.
Two major impacts of a weaker rand are that imported goods cost more and upward pressure is exerted on fuel prices. And these price hikes cause inflation to increase, delaying the possibility of a much needed interest rate cut.
SA Inc will suffer as global investors panic
South Africa has been relying on foreign investment to prop up its currency for some time now. In 2007 foreign investment on the JSE amounted to R64bn. But the situation has changed dramatically. In the first month of 2008 these investors sold R7.8bn worth of shares – and the rand will fall further as foreign investors move funds out of risky markets.
Many of you will remember the currency slump in December 2001. At that time the rand came perilously close to R14 to the dollar and R20 to the pound looked possible. If the currency depreciates to these levels again, the local consumer is in for tough times indeed.
Editor’s thoughts:
It is common knowledge that over the long term the rand will devalue against the currencies of our major trading partners. This means we will pay more for imports from the US and Europe in the future. Do you think the rand will devalue to levels last seen in December 2001? Add you thoughts below, or send them to [email protected]
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