During Q1 2010, SA consumer spending rose by an impressive 5.7%q/q, annaulised, 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, despite the loss of employment (see explanation as to why this occurred, below).
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.
As mentioned above, the sharp increase in consumer spending was mainly as a result of a strong rise in real household disposable income. Disposable income grew by 5.1%q/q, annaulised in Q1 2010, compared with 2.3%q/q in Q4 2009 and a decline of 2.7%y/y for 2009 as a whole. This is an extremely close relationship between changes in consumer income and consumer spending and obviously changes in consumer income is the main factor that determines the strength of consumer activity (especially since SA’s marginal propensity to consume is consistently close to 100%). The main determinants of consumer income are changes in employment and changes in salaries and wages.
A range of employment data has clearly demonstrated that SA has lost hundreds of thousands of jobs over the past 18 months, however, not as much attention has been paid to the fact that average incomes have risen fairly significantly. The earnings data released this week clearly demonstrated that reality. And crucially the rise in incomes have more than compensated for the loss in employment, again i have not seen much discussion on this.
The QES this week showed that gross earnings within the formal sector rose by an impressive 11.7% over the year to end Q1 2010; despite the job losses. The reason that incomes rose is that the average monthly earnings per employee in the formal sector rose by a relatively high 16.4% over the year to end March 2010 (see previous note).
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 has become more cautious around debt, but also the fact that household incomes have started to rise. 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.
While consumer’s remain under pressure, there is a sense/expectation that the pressure will systematically ease during the course of 2010. This expectation is based on the current low interest rate environment being sustained for all of 2010, a further moderation in inflation (at least in the short-term), wage increases that are now rising above inflation (leading to a real increase in consumer income), and less job losses as domestic and world growth improves. There is also a natural boost to employment and retail sales that is associated with hosting the Soccer World Cup. Additionally, there has been a more positive wealth effect this year, with house prices moving firmly higher. Growth in consumer bank credit also seems to be improving, albeit very slowly.
This 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 prices, such as electricity, water, health costs, insurance, education, petrol and toll fees - all combined - means that discretionary spending power will remain under pressure, unless there is a more meaningful increase in general consumer credit and or employment conditions.
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