South Africa’s economy grew by 3% last year and is expected to grow by 2.8% this year.
South Africa being a small and quite open economy is prone to the fortunes of the global economy. For now the turmoil in the global market seems to have stabilised with Europe taking a step back from the abyss and the US economy showing encouraging signs of recovery.
The US recovery is important for the global economy, but Europe is particularly important to South Africa as it is a major market for our exports. So the uncertainty over the European recovery is a serious concern. On the domestic front, rising consumer inflation is a major concern for domestic spending as well as the interest rate outlook.
The health of the consumer
The latest South African Reserve Bank Quarterly Bulletin provided an in-depth analysis of the state of consumers, particularly during the last quarter of 2011, and gives an indication of how consumers will fare in 2012.
Spending
Household consumption expenditure remained strong during the final quarter of 2011 in line with the strong retail trade figures we saw in the last half of the year. This was partly financed by disposable income which still posted positive growth; however, part of the expenditure was financed by unsecured lending, a loan that is issued and supported only by the borrower's creditworthiness, rather than by some sort of security or collateral that you provide the bank with. For disposable income to continue growing strongly the economy has to continue creating jobs. Unfortunately, jobs are not being created so consumer spending will weaken. It is also clear that using unsecured credit to finance expenditure is not sustainable in the long run. The retail trade figures for January came in much weaker than expected, which is not encouraging for consumption expenditure.
Debt
Some positive news on the consumer front is that the level of household indebtedness has been coming down steadily. Household debt as percentage of household disposable income declined from 77.1% in Q1 (first quarter) 2011 to 74.6 & in Q4 2011. With interest rates expected to remain unchanged for the greater part of this year households should be able to continue service their debts at the current low debt service costs. Lower household debt will ease pressure off consumers and leave them some income for expenditure; however, despite the downward trend debt levels still remain quite high.
Savings
Overall national saving as percentage of GDP increased between the third and fourth quarters of 2011. However, household saving as percentage of GDP remained unchanged at 1.6%, a dismal rate compared to consumers in other emerging economies. Although there was an increase in household disposable income, it is clear that a major share of that goes to buying goods and services. It is clear that we have a long way to go before we become a nation of savers but at least consumers are working down their debt levels as the interest charged on debt is far more that what they can earn on saving. So paying off debt is the first step towards financial freedom, particularly the more expensive debt of credit cards.
While the bank’s mandate is inflation targeting they do have a responsibility of doing so while taking growth and employment prospects into account. Growth has been revised downwards and consumers will be under pressure from the factors mentioned above. For these reasons it is unlikely that there will be a rate increase in the next few months; it is more likely that any rate increases will occur in 2013.
By Tendani Mantshimuli, consumer economist, Liberty Life