/ 3 May 2013

The black-belt economy kicks in

A classic black middle-class family: Oratilwe
A classic black middle-class family: Oratilwe

The black middle class has more than doubled in just eight years and its spending power packs a punch of R400-billion a year – much more than its white counterpart, whose growth is nearing stagnation. The black middle class increased to 4.2-million people last year from 1.7-million in 2004, according to a recent study from the University of Cape Town's Unilever Institute of Strategic Marketing entitled Four Million and Rising.

John Simpson, who led the study, said the emergent black middle class is driving growth more than any other sector in South Africa. Personal income in this segment has grown by 30% per capita since 2004, and household income went up by 34%.

While often presented in the media as being frivolous spenders, the facts suggest otherwise: 65% of the new black middle class own their own homes. They also invest heavily in education – 65% send their children to model C or private schools. The study found that 80% are more cautious about spending and 22% are struggling to manage their debt.

A property, data and analytics company, Lightstone, finds that home owners are profiting from the rapid increase in home values. Lightstone says that people who bought homes in the affordable housing market (houses below R250 000) have seen a ninefold increase in the price they paid for their homes compared with a fourfold increase for the market as a whole. The affordable housing market is now estimated to be worth R42-billion.

"South Africa's black middle class continues to rapidly expand and is more influential and powerful than ever before," said Simpson.

Asked whether the black middle class is the main driver of economic growth, "absolutely" was the response from Carel van Aardt from the Bureau of Market Research at the University of South Africa.

"When you look at the structure of the GDP [gross domestic product], the primary driver is household consumption expenditure – it makes up 60% of GDP in total."

Azar Jammine, director and chief economist at Econometrix, said this growing middle class certainly is a phenomenon, but it is nothing new: "It's been going on for a decade."

"[The growth in this segment] speaks very well for the future of the country," Simpson told the Mail & Guardian. "Middle class is what stabilises and drives economy – we spend; that is the way our economy grows. It also shows a movement towards the normalisation of society." [It increasing South Africa's skills base, deepening employment and widening the tax net]."

Exactly what middle class is in Africa remains a matter of fierce debate (see "The mission to define middle class"), but for the purposes of the study, Simpson said the institute used some main determinants.

Only black adults qualified and needed to meet at least three of the following four requirements: own a car, have a tertiary qualification, own a business or work in a white-collar or professional industry and/or have a household income of between R14 000 and R50 000 a month.

Jammine said middle class could be superficially defined as those earning more than R5 000 a month. Data from general household surveys indicated that this group had increased eightfold over the past decade, he said.

Consumerism
As a result of a thriving black middle class, consumerism is booming. The 4 Million and Rising research estimates the black middle class has R400-billion of annual spend.

South Africa has developed a retail culture over a number of years, said Kevin Lings, chief economist at Stanlib, but an economy should grow in a balanced way: "You don't want the extreme of anything … it represents too much risk."

The portion of the economy that has become reliant on retail for growth is not too extreme, but where it becomes much more of a factor is that over the past three years 91% of growth was driven by consumer spending.

The growth was driven by an increase in income – mainly household income, which came very substantially from government salary and wages because the public sector, the biggest employer in the country, doubled its wage bill over the past five years.

The Unilever Institute estimates that about 35% of respondents in its study are employed by the government.

The government resolved to become more expansionary during the time when the private sector was taking strain, Lings said. This counter cyclical fiscal policy was intended to cushion the downturn and provide some momentum to the upturn.

The resultant income boom found its way into a shopping boom. Retail became the best performing stock on the JSE , but the desire for imported goods such as clothing and electronics led to the country running up the largest ever trade deficit of R24.5-billion in January.

But the fact that South Africans are moving up into the black middle-class category does not necessarily mean they are moving out of the townships. The Roots 2013 survey, recently released by the Newspaper Advertising Bureau, also showed a thriving consumer culture in townships. Monthly household income ranged from R6 600 in Gugulethu to R9 300 in Alexandra in Johannesburg.

A large percentage of respondents owned cars, the majority owned a cellphone and most frequented local malls.

But Jammine echoed Lings' concerns about consumerism, suggesting that the emergent middle class could be investing more and spending less. "If it is going to housing, that is helpful … but a lot of it is going toward buying fancy new cars."

South Africa's vehicle sales continue to do well despite the recessionary backdrop, and Standard Bank asset and vehicle finance recently reported a 19% growth in its black customers between 2011 and 2012.

According to data from the National Association of Automobile Manufacturers of South Africa, new car sales increased by 4.1% to 163 092 units during the first three months of 2013 when compared with the same period last year.

"For many in the black middle class, cars still embody status and are perceived as 'shorthand' for social standing," said Simpson.

Investment
The black middle class is investing in certain ways – most notably in housing and education. Affordable housing remains in high demand and is showing impressive returns.

Standard Bank retains the lion's share of the affordable housing loan book, one in three, and this loan book reached R14-billion in 2012. Standard Bank defines affordable housing as properties between R250 000 and R600 000, and monthly household incomes of up to R18 000. Protea Glen in Soweto is one area in which banks are eager to finance properties because the repossession rate is a mere 1%, which is "on the low side", according to an affordable housing expert.

The Unilever Institute found the black middle-class's investment in education to be huge. "It's absolutely phenomenal. Education [for the emerging middle class] is the panacea of everything," Simpson said.

His research found that nearly 65% of the black middle class send their children to former model C schools or private schools. "This group sees that they need to catch up quickly and the way to do it is to get as much qualification as they can."

Winds of change
Despite the massive salary increases in the public sector, costs have started to catch up and, to sustain the mode of shopping, South Africans began to access unsecured credit, Lings explained.

But now the government Americanism prioritises infrastructure, meaning lower salary increases – "a hard sell when you have doubled the salary bill in five years," he said.

"Consumers are feeling the squeeze [so] the economy will slow, and the biggest source of growth will lose momentum."

The Unilever Institute has already found radical changes in consumer behaviour over the past eight years, in part due to the recession. "This group, in pretty rough times, learnt to manage their finances better."

The 4 Million and Rising study reported that consumers were curbing their spending and only using credit when something was absolutely essential.

Van Aardt said slower growth in the public sector wage bill as well as tightened lending criteria does not necessarily mean the black middle class will stop growing – there are other predictors of wealth such as education, entrepreneurship and the labour market, which remain in play.

The mission to define middle class
Experts agree that the black middle class is fuelling the economy, but the exact definition of the South African middle class is a grey area.

According to an article published by howwemadeitinafrica.com, a 2011 African Development Bank report defined the middle class as those with daily consumption between $2 and $20. The World Bank's definition of a middle-class consumer is someone earning between $2 and $13 per day.

But a recent report by professional services firm Ernst & Young suggested a more useful definition of middle class: people earning between $10 and $100 per day. This could be considered a "global middle class" – middle class by the standards of any country.

Azar Jammine, director and chief economist at Econometrix, said the middle class could superficially be defined as those earning more than R5 000 a month.

However Carel van Aardt from the Bureau of Market Research at Unisa said that using income to define middle class is problematic and more and more international studies are using multiple variables. "It is more important to look for clusters of people that share the same characteristics," he explained.

Learning is at the heart of this family
Thabo and Kgopotso Ramokgopa are perhaps the quintessential black middle-class couple. They are both public servants and they have two children: Nicole, aged nine, and Oratilwe, who is four.

They live in Pretoria where they bought their home at the height of the recession for R570 000. It is financed through Standard Bank, but the Ramokgopas try to pay a bit more than the monthly repayments. They also share one family car, an Audi S3, which they bought new.

Asked what their biggest expenses are, Thabo answers "clothes" and looks at Kgopotso accusingly. They both burst into laughter. "No, our bond," she says quickly, "our bond and our car insurance."

They think it is important that their children attend model C or private schools. "The curriculum is just much better," Thabo explains.

Education is also important to Thabo (31) and Kgopotso (29). Both are studying through the University of South Africa.

In a recent report the Unilever Institute of Strategic Marketing found that 76% of the black middle class aspire to starting their own business. The Ramokgopas are certainly no different and are currently considering an entrepreneurial venture.