SA economy finding a new balance
By Arthur Kamp, Investment Economist, Sanlam Investments
Less real income stunting consumer spending
The additional fall in the FNB/BER Consumer Confidence Index in 2Q16 is not surprising considering increased pressure on households’ real income amid higher inflation and constrained employment growth or even retrenchments. Generally, the depressed level of consumer confidence suggests continued weakness in consumption spending by households (real consumption spending fell outright by 1.3% annualised in 1Q16 already).
Higher car prices and interest rates hamper car sales too
Further the consumer confidence outcome is consistent with the downward momentum evident in the weakness in passenger car sales. Not only have car prices increased, but household debt servicing costs have increased too. The Reserve Bank increased its policy rate by 50bp in January 2016 and by a further 25bp in March 2016. The cumulative increase in the Bank’s repo rate since early 2014 is 200bp. In turn, car sales are one useful indicator of underlying economic conditions in the economy. This is, arguably, more applicable to relatively higher income groups.
Food prices the fiend of lower-income earners
Meanwhile, the real income growth of lower income groups, in particular, would have been reduced markedly by recent food price increases.
Hardly any job growth in the private sector
The near-term outlook for households is not encouraging. Domestic business profits margins are under pressure and firms can be expected to react, in part, by trying to control their wage costs, including possible retrenchments. Updated samples used by Statistics SA in compiling its Quarterly Employment Statistics release makes it difficult to gain an accurate handle on the trend in employment. Even so, it is evident there is hardly any employment growth to speak of among private sector firms. The trend in employment has been especially weak at mining firms, but weaker trends are also evident in, for example, manufacturing and construction.
Rebalancing is on the way
Looking ahead, the material improvement in South Africa’s trade balance of late suggests a rebalancing of the economy, albeit slow, is under way. This rebalancing has, in a sense, been forced on the economy, given an insufficiently high level of foreign capital inflows, which culminated in the depreciation of the rand and increases in domestic interest rates. But, rebalancing requires either higher domestic savings (lower consumption) or lower investment spending relative to the level of GDP. This implies continued weak final domestic demand, including household spending. The good news is, at least, the nascent (and expected) improvement in net exports suggests some sort of response from domestic producers is under way, which is consistent with the relative improvement in the manufacturing purchasing managers index since February 2016, following its collapse in late 2015. Even so, given the weakness of domestic demand, the economy is unlikely to grow in real terms in 2016.
The bottom line
Following the sharp depreciation of the rand in recent years and increases in interest rates, an adjustment of the economy is under way. Unfortunately, consumers / households will be impacted adversely by this through a weak jobs market and constrained real income growth.
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