The platinum strike, rising inflation and other factors have contributed to a "bleak outlook for consumer spending", according to a new report.
Private consumer spending is expected to be dismally low in South Africa this year, in an economy where 60% of its gross domestic product (GDP) relies on consumption.
A global research report released by financial services company HSBC on Wednesday predicts that expenditure by private households will grow by just 1.7% in 2014.
According to the report, the effects of the five-month long platinum strike, rising inflation and retracted growth in credit extension have contributed to a “bleak outlook for consumer spending” in the country.
“Beyond current supply-side disruptions, the economy faces anaemic domestic demand,” wrote David Faulkner, an HSBC economist for Africa and sub-Saharan Africa.
Consumption spending in South Africa has become particularly sensitive to expenditure on durables, says the report. This includes the purchase of vehicles, which has seen consistently low growth over the past year.
Vehicle sales decreased by 2.3% on the year in June, following a fall of 9.2% in May compared with a year earlier. “Although the actual number of passenger vehicles sold, at 35 355, is still comfortably above the 2008-2009 recession lows, the growth rate has slowed sharply,” said Investec economist Kamilla Kaplan.
Kaplan noted an observation made in the second-quarter EY/BER retail survey, that the vast majority of new vehicle dealers have slashed their order volumes. The survey says this implies that sales volumes are expected to slump further in coming months. The sector also faces a strike by 220 000 members of the National Union of Metalworkers of South Africa (Numsa).
The strike began on Monday last week, with employers and union delegates having met most recently on Wednesday morning to try to reach an agreement around wage increases. The strike has affected production at manufacturers such as BMW and General Motors. According to Kaplan, passenger vehicle sales are considered a leading indicator for household consumption expenditure.
“The pervasive underperformance in the vehicle market signals a further decrease in consumption,” she said in a note to investors. The HSBC report says car sales account for a significant portion of overall spending on durables. “The majority of consumer durables spending are on motor vehicles,” said the HSBC report.
“While this share has declined over time, from just above 80% in the early 1980s to about half last year … spending decisions on motor vehicles remains key to determining overall trends in durables consumption.
“Rising vehicle purchase prices and flagging demand are likely to result in a drop in durables consumption growth.”
The rich drive consumption
While the poor are most affected by monetary policy decisions such as interest rate hikes – which, although modest, have taken effect since January and are expected to climb moderately – the report says consumption in South Africa is driven by the wealthy.
“Given very high levels of inequality in South Africa, it is unsurprising that higher income groups account for the majority of private consumption,” it says.
“The 2010-2011 Income and Expenditure Survey, released by Statistics South Africa in 2012, shows that the top quintile of income earners (those earning R57 100 or more a year) accounts for 65.2% of total expenditure in South Africa.
“The next quintile accounts for a further 18.4% of consumer spending.”
In contrast, the lowest quintile in the country accounts for only 2.7% of overall consumption. Consumer confidence remains the highest among high-income earners in the country but they are “still at subdued levels when compared with the buoyant readings seen in the pre-crisis and post-crisis periods”, says the HSBC report.
“High-income consumer confidence has been weighed down by a negative assessment of the current time to purchase durable goods and to a lesser extent negative sentiment about the economic outlook.”
A week ago, Finance Minister Nhlanhla Nene said the country would probably fall short of its GDP growth target for this year of 2.7%.
Rating agencies and analysts similarly have revised their forecasts for growth down to around 2%, with HSBC predicting that GDP growth will come in line with private consumption growth at 1.7%.