Consumers in the doldrums bodes ill for the SA economy

Unlike many emerging markets, South Africa has a very robust domestic consumer market. Indeed, consumer spending represents about 60% of the country's GDP, which is huge, and makes consumer sentiment a really key variable for predicting the health of the broader economy. Given that, the ongoing weakness in consumer confidence is pretty bad sign. It likely means that consumers will be pulling back, spending less, borrowing less, traveling less, and generally living more frugally. Although this is good for individual households – especially those low-income households that have been on a shopping and borrowing binge and need to reboot – it's not great for the economy as a whole. In the absence of a surprise interest rate cut or a big uptick in exports, we can expect to see slower GDP growth, struggling retailers and manufacturers, and rising impairments at banks. Gloomy times ahead even as the JSE hits record highs. – FD

GUGULETHU MFUPHI:  Well, moving on to the local Consumer Confidence index, it showed an improvement from minus seven to minus six index points in the first quarter of this year.  Joining us now for more is Sizwe Nxedlana, Chief Economist at FNB.  Alec looks at me with a smile on his face.  I won't say why this time.  Nonetheless, let's get into this.

ALEC HOGG:  No, Sizwe has Nedbank's tie on, but he's at FNB.  I wonder if he's telling us something.

GUGULETHU MFUPHI:  Are you planning a move?

SIZWE NXEDLANA:  No.

GUGULETHU MFUPHI:  Not at any time soon.  Well, taking a look at the numbers, what was interesting for me was the commentary where you compared this to the levels we saw back in 2008, with the financial crisis.  How do they compare?

SIZWE NXEDLANA:  We are at levels, which show a significant lack of confidence at the moment.  In the last eight quarters, we've essentially had a consumer confidence of minus seven in those eight quarters, and I think it signifies a confluence of factors that essentially began in the second half of 2008 when we had the flare up of the Euro Zone debt crisis.  Very soon, in the quarter that followed, the domestic risks as labour unrests flared up following Marikana.  Since then, there hasn't been an abatement of either labour unrest or some type of global flare-up.  Over and above that, we've also seen many things, which were driving consumer income since 2009, lose steam.  Here, I'm talking about unsecured lending, massive increases in government spending, and more recently, higher interest rates and the signal that we might get more.  That led to a decline or a moderation in households' disposable incomes, and I think the consumer confidence numbers, being negative for such a long time, signalled that.  The fact that they're negative at levels that are close to what happened during the Great Recession and even what happened during load shedding, just substantiates the fact that consumers are not very happy at the moment.

ALEC HOGG:  It's not a good time to have an election, if you think about it, if consumers aren't happy.  They like to vote for the people in power when they're happy.  Now they're not happy.  Do you think we're going to see a reflection of this?

SIZWE NXEDLANA:  Well, I don't know that there's a direct correlation between electoral results and consumer confidence, just as there's not necessarily a direct correlation between a flare up in service delivery protests and what actually, transpires in the elections.

ALEC HOGG:  Our country's different then, because I can tell you that an Obama, a Tony Blair, or one of the Western politicians would look at these numbers and say 'no election now, thank you'.  However, getting to those three questions you asked, the one that jumps at you is 'is it time to buy durable goods (furniture, cars etcetera)' and that seems to be going – very much – in the wrong direction.

SIZWE NXEDLANA:  Yes, and I think it ties in with what's actually happening within the spending components of durable goods, and those are coming off.  If you look at the vehicle sales figures, those are coming off, and we're starting to see some softness in the demand for property too, following the interest rate hike.  I think consumers are looking at what's happening and they are essentially telling us they're going to adopt a defensive posture, and even more of a defensive posture than what has transpired in previous quarters.  If you break down the survey according to income levels, what you find is that high-income consumers are actually okay if you look at what they're telling us about their own finances.  At the high-income levels, consumers are saying 'we're not that negative about our own finances'.  In fact, they're reasonably positive.  I think that the level of rates and finances is only slightly below the long-term average – eight versus 12.  However, when you go to low-income households, they are outright bearish, so now is not a good time to buy durables.  We don't like the prospects of the economy and our own finances are coming under pressure.  If you look at where the problems have occurred as they pertain to household consumption, it's doubtless in unsecured lending, or rather, the tightening criteria on unsecured lending products, the fact that government is beginning to slow down the public sector employment, and the fact that government is slowing down and that could negatively impact Social Grants.  If you look at where the upward pressures on the CPI have been, they've been in the components of the basket that I would argue low-income households are most exposed to.  Again, if you look at the company results, it seems as though the companies that tend to cater to higher-income households, are doing slightly better than those that cater to lower-income households.  It therefore seems that pressure is particularly acute amongst the lower-income households.  If I can mention one last thing…even if you look at the NCR data, non-performing loans on mortgages or presumably, people who have mortgages are people who tend to be in the higher income segments…they've actually been trending down.  It tells you there's a disparity between high-income households that are okay, and low-income households that are not that happy.

GUGULETHU MFUPHI:  That strikes me because one thing, which has always been peculiar, is how these miners who are striking at the platinum belt, are surviving.  Many of them are going back home, and living off their livestock as well as off the land.  Surely, that's not sustainable.

ALEC HOGG:  Did you read Peter Bruce's piece?  He actually wrote it from the Transkei this last week, and he was saying it's chaos out there in the areas behind where his family's holiday home has been, that people who previously, were relying on this income are now having to go to the cities, and try to find work, which doesn't exist.

SIZWE NXEDLANA:  I think we also mentioned that fact of the labour unrest, and to the extent that it has continued for an extended period.  If you look at where unemployment has been, I think we created forty thousand formal jobs last year, but sectorially, the splits were quite interesting.  The sectors that have suffered a lot from labour unrests are where the jobs were shed – mining, manufacturing, as well as transport and logistics.  I think that those sectors also tend to be more intensive in unskilled labour and the strikes are amongst unskilled workers.  That also ties into the fact that obviously, to the extent that when you embark on strike action, you may lose some income and it ties back to the fact that you reflect that as an outright bearishness in your consumer confidence.

ALEC HOGG:  Many people rely on those jobs.  Sizwe's going to get into trouble.  He just said we created forty thousand jobs last year – not five-hundred-and-seven thousand.

SIZWE NXEDLANA:  I said 'formal jobs', so there's a difference between the quarterly labour force survey…

ALEC HOGG:  We can't go there now.  That five-hundred-and-seven thousand…eish.

GUGULETHU MFUPHI:  Maybe this is a good indicator, because we spoke to you recently about the dire situation regarding the construction index.  Now, the consumer index is also showing a dip, so are we going to create any jobs this year?

SIZWE NXEDLANA:  Look, overall, I think there's a silver lining here.  Our overall theme for the two-year ahead outlook is underperformance and adjustment.  What are we adjusting from?  A large, current account deficit.  Let's say minus five percent of GDP or between R150bn and R200bn, and that reflects a gap between expenditure, which has significantly outperformed income.  Now, if you're a household and you need to adjust from that, two things need to happen.  You need to tighten the belt on expenditure, and you need to make more money.  For a country, that translates into slower expenditure, and that is what's being reflected by these consumer confidence numbers.

ALEC HOGG:  So we're adjusting – the rebalancing is happening.

SIZWE NXEDLANA:  Exactly, and if you look at the current account deficit, it has come from minus six to minus five.  If you look at employment volumes and employment values, the current account adjusted because imports fell by about four percent in terms of value, and exports rose by about one percent.  That adjustment is therefore happening, but along with it comes softer domestic expenditure.