SA Consumer Activity

Consumer activity is in focus globally. This is because most economies need to experience a sustained increase in final demand in order to ensure a more convincing economic recovery. The situation in SA is no different. Consumer spending currently represents 61% of the SA economy. Hence the vitality of the consumer is crucial to the health of the SA economy.

In order to access the state of the South African consumer we look at three key aspects, namely, factors impacting household income and wealth, secondly, key indicators of consumer activity and lastly the sustainability of consumer spending. A range of charts are attached to support the discussion.

Household income and wealth:

• Household disposable income grew by an impressive 5.1%q/q, annualised in Q1 2010; in real terms. This compares with growth of 2.3%q/q in Q4 2009 and a decline of 2.7%y/y for 2009 as a whole (see chart attached). The increase in income occurred despite a further significant decline in employment. In fact since Q4 2008 the SA economy has lost a massive 1.1 million jobs in both the formal an informal sector.
  
  
• The recent rise in disposable income has been mainly due to an increase in salaries and wages. The latest Quarterly Employment Survey reflects the fact that gross earnings within the formal sector increased by an impressive 11.7% (in nominal terms) over the year to the end of Q1 2010, with the average monthly earnings per employee growing by a substantial 16.4%y/y (including bonus payments, especially in the construction sector).
  
  
• The recent rise in household income is made more effective by the fact that inflation is now well within the target range of 3% to 6% and still trending lower. CPI inflation could fall below 4%y/y in the coming months. Furthermore inflation is expected to remain inside the target, albeit with an upward bias, during 2011.
  
  
• There is an extremely close relationship between changes in consumer income and consumer spending. Changes in consumer income are the key factors that determine the strength of consumer activity, especially since SA’s marginal propensity to consume is consistently around 100%.
  
  
• Household wealth is also on the rise. This is mainly due to a solid increase in house prices (the latest ABSA housing survey shows that the average house price has risen by 15.2%y/y) as well as a rebound in the stock market. Additionally, the growth in household income has exceeded the growth in household debt.
  
  
• In Q1 2010 the ratio of household debt to disposable income eased further to 78.4% compared with 79.9% in Q4 2009 and a recent peak of 83.4% in Q1 2008. The steady reduction in the debt to income ratio partly reflects the fact that consumers have become more cautious around debt, but also the fact that household incomes have risen meaningfully. This ratio is expected to continue to subside into 2011 as household income grows faster than debt. In terms of the conventional measure of debt servicing costs (see chart attached) the ratio has continued to decline and is now around 8%, which is low by historical standards.
  
  
• SA household net savings are extremely poor at -0.2% of disposable income. Although net savings are extremely low, contractual savings with the inclusion of unit trusts remain relatively high. Future growth in contractual savings is, however, highly dependent on employment growth as well as an improved savings culture.

Key indicators of consumer activity:

• During Q1 2010, SA consumer spending rose by an impressive 5.7%q/q, annualised, compared with a rise of only 1.6%q/q in Q4 2009 and a decline of 3.1%y/y for 2009 as a whole. The increase in spending was primarily boosted by an increase in household disposable income. The increase in spending was reflected in most categories of consumer activity including spending on durable goods, up a massive 16.8%q/q (mainly purchases of motor vehicles and electronic goods), semi-durables up a huge 28.4%q/q (mainly clothing and footwear), and non-durable goods up 9.5%q/q (mainly food and beverages, but also petroleum products). In contrast, spending on services declined by 4.6%q/q. This was mainly due to a decline in spending on transport services.
  
  
• A range of other consumer related indicators have improved measurably over the past few months. These include an upward trend in consumer confidence, increased home sales, lower debt servicing costs, a pick-up in consumer credit albeit very modest, as well as a downward trend in insolvencies and bad debts. In April 2010 insolvencies fell by a very welcome 26.7%y/y, and in the first five months of 2010 insolvencies were down a healthy 24%y/y. Insolvencies/bad debts tend to be a late cycle indicator, and are especially heavily impacted by an increase in unemployment (which was severe in 2009). Fortunately, households tend to benefit relatively quickly from sustained cuts in interest rates and lower inflation. This should continue to reflect in a downward trend in insolvencies/bad debts, off a very high base, into 2011.

Sustainability of consumer spending:

• While consumers remain under pressure, there is a sense or expectation that the pressure has and will continue to systematically ease during the remainder of 2010 and into 2011. This expectation is based on the current low interest rate environment being sustained well into 2011, a further moderation in inflation (at least in the short-term), positive income growth helped by the fact that wage increases are now rising above inflation (leading to a real increase in consumer income), and a more stable labour market as domestic and world growth improves.
  
  
• Importantly, this does not imply that the consumer spending will return to previous highs; but instead a more robust increase in consumer credit as well as a dramatic increase in employment would be required. Every 100 000 increase in SA employment boosts consumer spending by at least 0.5%. Hence, a sustained annual increase in employment of 500 000 a year would add (very conservatively) at least 2.5% to SA GDP annually. Unfortunately, a rise in employment of 500 000 a year is a very unlikely scenario for the next few years given the current lack of private sector expansion plans. Sadly, although interest rates are at 30-year lows and large company’s balance sheets are generally in good shape, there are a number of reasons why private sector expansion plans are currently very limited, including concerns around the provision of electricity, excess labour regulation, shortage of key skills, uncertainty within important areas of government policy, and spare capacity.
  
  
• The increase in overall consumer income and spending does not imply that the consumer will be able to effect a significant increase in discretionary spending during 2010/2011. Instead the substantial increase in administered or regulated prices, such as electricity, water, health costs, insurance, education, petrol and toll fees - all combined - means that discretionary spending with the inclusion of spending on financial services as well as investment products will remain under pressure into 2011.

Overall, it can be argued that the SA consumer is past the worst of the recession and that there has been an improvement in consumer income (off a very low base) and many areas of consumer activity. However, without a meaningful increase in employment, the consumer recovery is likely to remain relatively gradual and well below the previous growth rates.

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