The South African economy has a long history of the tertiary sector (consumption side) being a resilient pillar of growth, but this long, unbroken run was shattered with the release of the GDP figures for the first quarter of the year. The numbers showed that the sector contracted by a full 2% quarter on quarter. The collapse was the result of every industry in the sector shrinking, but the most notable figure was the 5.9% collapse in the retail and wholesale trade sector, which reflects just how weak household consumption is.
Household consumption expenditure dived 2.3% quarter on quarter, with spend falling significantly on food and non-alcoholic beverages (3.4%), alcoholic beverages and tobacco (7.4%), clothing (12.1%), recreation (8.5%), and restaurants and hotels (8.6%). It’s clear that South Africans are cutting back dramatically in these difficult times. To find a comparable period in the history of the tertiary sector’s performance, we have to go back three decades, to the mid1980s, when the sector contracted by more than 3% for three quarters, albeit not consecutively. It was a period which, like now, was characterised by a contraction in every industry in the tertiary sector, plunging consumer confidence, precipitous falls in the trade sector and recession.
The difference between now and then is that during the ’80s, both inflation and interest rates were north of 20%; this time the inflation profile is within the South African Reserve Bank’s target band and trending lower, and interest rates remain accommodative and steady. Why, then, has the modest relief of falling inflation and low interest rates not translated into some boost for the consumer? The key, as it is with private sector fixed investment, is confidence.
Consumers continue to tighten their belts, deferring purchases until sentiment changes, while at the same time running down household debt. In the five years before the recession of the ’80s, the proportion of household debt to disposable income rose from about 35% to 55%. This was followed by roughly another five years of household balance sheet deleveraging after the recession. In 2017, household debt levels are much higher, but the consumer response of today appears to be similar to that of 30 years ago. After the rapid rise in household debt to near 90% of disposable income in 2008, households have been slowly de-gearing, with the current level standing at 73.4%. The running down of household debt is not solely due to consumers’ reluctance to spend. Credit is now harder to come by, and loans to the household sector have been contracting in real terms since 2012. Lenders have become more circumspect in their practices, and credit lending criteria have been tightened by new laws implemented to better protect the consumer and, indeed, the lenders.
The Reserve Bank’s Quarterly Bulletin for the first quarter of 2017 will be released this week, and it will almost certainly show a further drop in household debt levels. Household balance sheets are healing, and while this bodes well for the future, it is a significant drag on the tertiary sector and on GDP growth. So, for how much longer will consumers hold back on their spending? Well, if the ’80s are anything to go by, it could be for as long as another 18 to 24 months — so growth for the country will remain weak over the medium term. Of course, it doesn’t have to take that long, but it would require a dramatic shift in consumer confidence.
This article originally appeared in the Sunday Times on 18 June, 2017