SA consumer under enormous pressure

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By Kevin Lings

For a number of months we have been highlighting the enormous and increasing pressure on the consumer. This follows a four-year period of astounding growth in consumer income and spending, as well as an unprecedented increase in consumer debt. The release of the Q1 2008 SARB Quarterly Bulletin yesterday provides some additional evidence and confirmation of this pressure. The following is a list of the current key factors impacting negatively on the consumer, including the factors identified from the latest Quarterly Bulletin:

• SA interest rates have increased by 500bps since June 2006 and are at their highest level since July 2003. Unfortunately a further rate hike of 50bps cannot be ruled out in August 2008.

• SA household debt reached an all-time high of 78.2% of disposable income in Q1 2008. Consumers have more than doubled their debt in the last four years

• The interest cost of servicing debt has increased from only 6.3% of disposable income in Q1 2004 to over 11.5% of disposable income in Q1 2008. This is likely to increase further.

• SA consumer savings levels continue to deteriorate. In Q1 2008 net household savings, as a ratio of disposable income, were recorded at -0.7% and at -0.6% for 2007 as a whole. The 2007 level is the lowest net annual consumer savings rate ever recorded in South Africa. Unfortunately, this suggests that the average consumer has almost no savings as cushion during hard times.

• Personal disposable income is now growing at only 2.7% q/q in real terms. This represents a massive slowdown relative to the peak growth rate of 9% real in Q4 2006. Given that consumer inflation is now rising faster than most wage increases, disposable income is likely to continue to slump, dragging the growth in consumer spending lower.

• During the period 2004 to 2007 SA employment rose by an impressive 1.8 million. However, given the current slowdown in economic activity, employment is unlikely to experience much growth at all over the next year. Hopefully, the general skills shortage will help to contain job losses.

• Key non-discretionary spending items are up dramatically in price, in particular fuel, food and electricity. Electricity tariffs have been increased by 27.5% for the year 2008/2009, with increases of between 20% and 25% a year expected for the next three years. Consumer food inflation is currently at 15.9% y/y, while the petrol price has increased by 38% over the past year with a further very large increase expected in July. The current average under-recovery on the petrol price is around 70c/l. This implies that discretionary consumer spending on items such as cars, furniture, appliances, clothing, jewellery, etc will be under enormous pressure for at least the next year.

• SA house prices have started to slump. The ABSA house price index shows that the growth in the average house price has declined from well over 30% y/y in 2004 to a mere 4.3% in May 2008. The STD Bank house price index shows house prices declining by 13.2% y/y in May 2008. The slump in house prices is likely to create a negative wealth effect, which will further hurt consumer confidence and spending.

The combination of the above factors is likely to lead not only to a very significant slowdown in consumer activity, but also a very noticeable and perhaps alarming increase in debt defaults over the next 18 months.

Source: Kevin Lings, Stanlib, June 20, 2008.


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