In its first Consumer Outlook 2016, Standard Bank economist, Zaakirah Ismail analyses the South African consumer from a macroeconomic perspective and presents Standard Bank’s consumer outlook for 2016.
South Africa has one of the most unequal societies in the world. The Gini coefficient declined only slightly between 2006 and 2011, from 0.72 to 0.69; change has been slow indeed. The emergence of the middle 60% of the population contributed to these improvements, while the poorest 20% of the population saw a decline in the share of national income.
Nevertheless, poverty levels are slowly declining. Between 2006 and 2011, the proportion of the population living in poverty (using the national upper bound poverty line) fell from 57.2% to 45.5%. We believe that this could be attributed partly to the aggressive expansion in the social grants programmes.
Standard Bank expects cyclical consumption to slow, while non-cyclical consumption may be more resilient than in previous downward phases of the business cycle due to increased support from the public sector. Households in the lower income groups, many of whom rely on social grants for income, contributed approx. 32% to total expenditure in 2015.
Notwithstanding, the extent of the countercyclical support from the government will be limited with respect to employment expansion. Further, Standard Bank expects wealth-backed spending to be constrained, as wealth took strain last year. Upper income households (deriving significant incomes from investments) contributed over 7% to total spending in SA in 2015.
Despite the rising cost of money, demand for credit remains healthy, although over half of all credit applications end up being rejected. Standard Bank believes that growth in employment in 2015, particularly in Trade, Finance and Public sectors, supported demand for credit. Lower commodity prices and the effects of the ongoing drought will weigh on employment prospects in 2016, which could affect debt-servicing.
South African consumers have deleveraged since 2008. High debt levels may be a threat for consumers in the context of rising cost of debt-servicing (we expect the SARB to raise interest rates by a further 50 bps this year); higher taxes coupled with our expectation of net job losses and slightly negative real wage growth in 2016. In the past, insolvencies have tended to rise alongside rising interest rates during the downward phases of the business cycle.
However, in the current downward phase of the business cycle, Standard Bank notes that insolvencies have not risen despite rising interest rates, which may indicate more resilience by consumers, compared to previous phases.
Notwithstanding the high number of accounts in arrears and/or impaired, the credit profile of the South African consumers has improved marginally relative to the same time last year, as depicted by rising capital and interest repayments as a ratio of debt stock, and a declining number of individuals with impaired records.
Food inflation is expected to peak around 12% y/y in H2:2016 as high domestic maize prices feed through; Standard Bank expects bad debts to rise as a result. Standard Bank believes that the current drought will be a double whammy for poor households. According to Stats SA’s Poverty Trends 2006-2011, poor households spend 33.5% on food, while non-poor spend 10.8% on food.
Further, there may be detrimental effects on subsistence farming. About 18% of SA households are involved in subsistence farming. The effect of the drought on these households is a loss of income and the overall worsening of already bad food insecurity situation in SA.
Approximately 23% of households in South Africa have inadequate access to food.