Out of pocket: SA’s consumer crunch

SA’s economic recovery from the pandemic was gathering steam in the first quarter of the year, before the war in Ukraine sent food and fuel prices soaring, derailing global growth and setting back SA’s prospects.

These factors, which have reignited inflation and accelerated the pace of the Reserve Bank’s rate-hiking cycle, mean that real consumer spending and retail sales growth in SA will likely slow over the rest of the year.

However, there are some positive domestic developments that will temper the deceleration and should prevent consumer spending growth from turning negative.

These include the recent relaxation of Covid restrictions on gatherings, which should greatly benefit the sporting, cultural and entertainment industries. In addition, the continued opening of the economy through the further easing of international travel regulations should benefit the tourism, hospitality and accommodation sectors.

Furthermore, many South Africans managed to accumulate savings during the Covid lockdowns over the past two years as the various restrictions inhibited spending. The government has also extended income support to lower-income groups.

This means some areas of consumption spending could recover further, especially in the services sector, including restaurants, hotels, recreation and culture. Likewise, the return to the office should bolster clothing, accessories and footwear sales.

But food and alcoholic beverage sales are likely to suffer.

This is the mixed picture painted by Bureau for Economic Research (BER) consulting economist Linette Ellis, who has taken a deep dive into the outlook for consumer spending in SA.

Things were “ticking along nicely” at the start of the year, says Ellis. It was not enough to constitute a party (consumer spending had only just recovered to its pre-Covid level), but retail sales growth had remained firm in the first quarter, posting real quarter-on-quarter growth of 1.9%.

The accommodation sector rebounded strongly from a low base, with spending surging 130% year on year in January and February, on top of a 71% y/y rebound in the final quarter of last year. Restaurant spending soared 31% y/y in the first quarter and new vehicle sales were up 25.6% y/y.

Despite the KwaZulu-Natal flooding disaster, supply chain disruptions, stock shortages and affordability concerns, new vehicle sales are now 6.6% above where they were in the first quarter of 2019.

However, there are indications that consumer spending growth began to slow from March, causing Ellis to revise down her forecast for the rest of the year.

The surge in fuel prices and higher food inflation, as well as the rotation out of spending on goods to spending on restaurants and other services, is likely to weigh on retail sales volumes from April 2022 onwards, particularly for food and alcoholic beverages, she says.

She now expects real consumer spending growth to slow from 5.7% in 2021 to 2.5% in 2022 (previously 2.6%) and 2% in 2023 (previously 2.1%).

Stanlib chief economist Kevin Lings is a touch gloomier, noting that in addition to higher fuel, inflation, and interest rates, SA’s ongoing lack of job creation and renewed electricity outages (which discourage people from travelling to shopping centres) have hurt discretionary spending.

Ultimately, without a meaningful and sustained increase in SA’s overall level of employment and consequent rise in household disposable income, retail sales activity will struggle to reflect outright vibrancy
— Kevin Lings

At the same time, he notes that consumer confidence remains relatively low, which tends to dampen people’s willingness to purchase large-ticket items.

By the final quarter of last year, the FNB/BER consumer confidence index (CCI) had recovered to -9 index points, as some of the anxiety surrounding the Covid crisis eased. This was a return to the pre-Covid level, and a far cry from the -33 it reached in the early days of the pandemic.

But in the first quarter of this year, the CCI slid to -13 — a weak reading against a long-term average of +2. This signals a low willingness to spend or increased caution among consumers. However, it also partly reflects consumers’ shock at the outbreak of the war in Ukraine in February.

Fortunately, low interest rates and the fact that many consumers managed to build up savings during the pandemic should help to soften the blow, particularly for high-income and indebted consumers.

The decline in debt service costs alone, thanks to 300 basis-point cumulative cuts in interest rates since the start of the pandemic, has put R45bn a year back into consumers’ pockets.

“Of course, all this is going to change,” says Ellis, pointing out that interest rates, fuel, electricity prices and general inflation are all moving up while stock prices are tumbling. In addition, many high-income earners are starting to travel overseas again, depleting their savings while spending offshore rather than at home.

“So, the picture for the high-income group has changed from fairly positive to less than supportive, but I don’t expect an outright contraction in spending,” says Ellis, noting that though interest rates are rising, they remain low, and many households still have the scope to take on more credit.

(The Reserve Bank’s forecast trajectory for the repo rate implies that it will remain negative in inflation-adjusted terms this year, averaging -0.9% in 2022 compared with -1.5% in 2021, before turning positive in 2023.)

Low-income consumers are in a far worse position. They will be the hardest hit by rising fuel and food prices, because these items make up a larger share of their monthly expenditure.

For instance, the Pietermaritzburg Economic Justice & Dignity group estimates that the price of a specific basket of food typically consumed by low-income households surged by 8.2% (R344) y/y in April, rising from R2,227 to R2,414. This should be seen against the Bank’s assumption that overall food inflation will average 6.6% this year.

But here, too, there are certain positive forces at work, which should counter some of the negative impact of rising inflation.

First, the National Treasury projects social grants growth of 10.6% in the coming fiscal year, up from 2.6% in 2021/2022. This mainly reflects the extension of the R350-a-month social relief of distress grant for the rest of the financial year, which will place about R44bn into the hands of low-income households. It should provide some underpin to nondurable goods sales, despite rapidly rising food and fuel prices.

Second, the opening up of the services sector and return to office work should be positive for job creation in the hospitality industry and transport sector.

“These factors won’t compensate fully for the rise in food, fuel and electricity prices,” says Ellis. “Consumer spending will still slow down, but it is unlikely to turn negative.”

The consumer spending growth outlook is bleakest for the hardware, household renovations and furniture sector, she believes.

This sector was given a big boost by Covid, as strict lockdowns forced many people to cocoon at home and create home office spaces. But with people returning to work, spending on this category has recently already turned negative, amplified by high statistical base effects. Rising interest rates will further curtail spending on these big-ticket items.

The retail food sector is also likely to see a decline in sales by volume (if not by value) as food prices rise. At the top end, supermarkets could lose sales to the restaurant sector, which still has a lot of scope to recover from the depths it plumbed during the worst of the pandemic, according to Ellis.

The same applies to cinemas, live entertainment, sporting events and other forms of culture and recreation, assuming the government refrains from imposing any more lockdowns.

In short, Ellis concludes that the return to work and fewer lockdowns should continue to bolster semi-durables and services, but that fuel, food and electricity price hikes will hurt nondurable goods while interest rate hikes will eventually hit durables.

The bottom line for Lings is that while retail sales will likely record positive growth over the year as a whole, he expects overall consumer spending to remain relatively subdued when compared with previous years, and certainly below the level of spending that would encourage an expansion of employment in the industry.

“Ultimately, without a meaningful and sustained increase in SA’s overall level of employment and consequent rise in household disposable income, SA retail sales activity will struggle to reflect outright vibrancy or sustain a more vigorous rate of expansion,” he says.