Is South Africa's consumption boom sustainable?
Plenty has been written about the current South African economic climate. The country is enjoying a period of sustained growth, in part supported by increasing consumption demand.
Old Mutual Investment Group (SA) (OMIGSA) held their quarterly press conference in Johannesburg last Thursday. At this event, Rian le Roux, Head of Economic Research, OMIGSA shared some of the groups views on the current consumption boom. He set out to answer the question:
"Is South Africa's current investment and consumption boom sustainable?"
The four key factors for sustainable growth
The outlook for the South African economy is very different today than two decades ago. Le Roux believes there are a number of factors which will significantly impact on the economy in the coming years. He also feels that many analysts have failed to factor in the importance of these developments.
The first factor mentioned is that the global economic environment is different to that which prevailed years ago. World economies are benefiting from strong growth and firm commodity prices. Governments across the globe are being rewarded for sound policies which in turn generate strong growth.
Second, South Africa has completed a number of deep structural adjustments in the past ten years. The weak economic fundamentals which existed at the time of political transition have been massively improved. Le Roux's third observation was that stability and predictability have returned to the local economy. Inflation, interest rates, economic growth and exchange rate levels are far less volatile than before. This makes the task of economic forecasting and planning much easier.
Finally, there has been a major shift in global policy toward emerging markets. This means that the global economic policy headwinds that used to stymie growth in South Africa no longer exist.
Consumption boom bolstered by income growth
The Bureau for Economic Research publishes a consumer confidence index as an indicator of domestic consumer confidence. This index is at its highest level since it was first used in 1982- and the current period of consumer confidence is the longest on record.
This confidence can be ascribed to real income growth, strong consumer balance sheets and the absence of political shocks. Le Roux was keen to stress that the stable political environment had contributed significantly to consumer confidence. Sound economic policy helped to create an environment in which the price of many consumer goods actually fell sharply in recent years. Stronger employment and real wage growth also contributed to consumer confidence.
Food, petrol and inflation
Despite all the positive news, consumers are very aware of the threat of higher inflation and the promise of higher interest rates to combat it. The petrol price will creep past the 700c per litre price at the end of April- and with it the prices of many consumer goods that rely heavily on South Africas road transport network for distribution.
The threat posed by higher inflation cannot be ignored. However, the real threat to the current consumption boom comes from abroad. Le Roux fees that the major risk to South African consumption growth is an offshore 'shock'. If something goes wrong internationally, then it is likely that offshore investors will pull the plug on emerging markets like South Africa.
The result would be a huge capital outflow from the domestic economy- which would in turn place huge pressure on the current account, perhaps leading to problems in financing the deficit. For now, this problem seems rather distant- and the consumer booms looks set to stay.
Editor's thoughts:
Many analysts feel that the consumer expenditure boom is here to stay. We have certainly not noticed any concern on trips to various supermarkets in the Gauteng area. Do you believe that domestic consumption will remain at high levels- or will we start to spend more sparingly? Send your comments to [email protected]
