South African consumers and borrowers held their collective breaths on Thursday as the monetary policy committee (MPC) kept the country on the knife edge regarding its interest rate decision.
While the economy is struggling under high interest rates and a global economic slowdown, the MPC stuck to its inflation targeting guns and provided only moderate relief with a 50 basis point cut. This brings the prime lending rate to 15%.
This, the first cut since April 2005, is a signal that the interest rate cycle is turning. But it is unlikely to bring households much joy this festive season. All borrowers and a fair amount of economists would have liked to have seen a full 100 basis point cut. The good news is that a turn in the interest rate cycle has lifted the spirits of economists who expect the economy to be in better shape in a year’s time.
The Reserve Bank’s quarterly bulletin, released two days before the rate cut decision, showed that the consumer’s back has finally been broken, with household spending contracting by 0,8%, the first fall since 1998. It also showed an improvement in the household debt levels with household debt as a percentage of household income falling to 75,3% from 76,6%.
Somehow, despite the tougher economic conditions, households’ savings rates improved marginally from -0,5% to -0,3%. This indicates that households have been using spare cash to pay off debt rather than on spending. As the consumer is the only real target of interest rate policy, this was possibly the evidence the MPC needed to be assured that the consumer was no longer an inflation threat.
And if Reserve Bank Governor Tito Mboweni was concerned that a rate cut would encourage people to spend over the festive season, the retail figures should put his mind at ease.
The Bureau for Economic Research (BER) / Ernst & Young Festive Season Retail Trends survey showed that a net majority of retailers experienced a fall in sales compared with last year. This is the weakest result since the 1992 festive season. Perhaps even more concerning is the fact that 34% of the respondents expect purchases to be lower in the first quarter of 2009 compared with the same period in 2008.
“If these bearish expectations turn out to be accurate, it will be the second-worst sales performance on record (after 1992) since 1986 … ” said the report. It concluded that even with a rate cut consumer demand is projected to start to recover in any meaningful way only from the second half of 2009.
The retail sector is already officially in recession with figures this week showing that for the three months to October retail sales declined 4,5% in real terms.
The FNB/BER consumer confidence index fell to -4 in the fourth quarter from -1 last quarter. This is the lowest level of consumer confidence since the first quarter of 2004.
Stanlib economist Kevin Lings said that as there is a reasonably close relationship between consumer spending and consumer confidence, one can expect further downward pressure on consumer activity.
Possibly a major contributor to consumers’ lack of confidence is the start of massive retrenchments. According to trade union Solidarity, 32 major companies have already started to retrench 22 000 people.
The average income earner in South Africa supports eight to 10 people so these job cuts will mean a further 200 000 South Africans will have no money to spend at all.
However, these official job cuts are only the tip of the iceberg in terms of total expected retrenchments and Solidarity has estimated that by June next year 310 000 people will be made redundant. Even if the true figure is only half that amount, it would affect about 1,2-million South Africans.
The one light on the tree for consumers is the oil price, which has fallen 70% from its peak. Even though the rand has depreciated 28% against its trading partners, South Africans will still see a significant improvement in the price of petrol. The latest price cut of R1,61 has already shed R80 off a 50-litre tank of petrol and it is unlikely that we will see a significant rise in the oil price in the short term.
Although Opec is expected to cut output after its meeting on December 17, demand for oil is set to continue to fall. The United States Energy Information Administration said this week it expected global oil demand to fall to 450 000 barrels a day in 2009, marking the first drop in world oil demand year to year since 1983. This will have a significant positive impact on consumer pockets and should see inflation falling ahead of expectations.
Demand drops
Local energy intensive users have cut their electricity consumption by about 1 000MW, according to Eskom spokesperson Fani Zulu.
But the reduced demand is a “temporary reprieve”, said Zulu, as large energy customers such as mines and smelters slow production following a fall in commodity prices.
Zulu says that the financial crisis, and its resultant reduction in energy demand, has merely given Eskom the “breathing space” to carry out essential maintenance work in preparation for a possible increase in demand as economic conditions improve. — Lynley Donnelly