Fuel, utilities gobble up spare cash

(John McCann/M&G)

(John McCann/M&G)

Unless you’re a billionaire,  chances are that times are feeling really tough.

Higher taxes in this year’s budget, in particular the one percentage point increase in value-added tax (VAT) and higher fuel levies and other excise duties, have reduced South Africans’ disposable income, says Absa economist Peter Worthington.

Economists say the effect of April’s VAT increase will only be learned next week on Tuesday.

Meanwhile, Statistics South Africa has reported that it was 0.1% cheaper to buy food in June than it was in April 2018. For example, the average price of brown bread in June 2017 was R12.24. In the same month this year, it was R11.53.

Many products, particularly those derived from grains, are cheaper in 2018 after agricultural production increased in 2017 after the drought in 2016. The drought also caused food inflation to peak at 12%. It has now fallen to 5.9%.

Most supermarkets have also tried to contain the prices of food.

Shoprite chief executive Pieter Engelbrecht says the group absorbed much of the general inflation (15% VAT, fuel price increase and sugar tax), which meant its internal selling price inflation declined from an average 5.9% a year ago to just 0.3%. 

By the end of June this year, the prices of 13 241 food items were declining.

Pick n Pay, according to its financial results ending February 2018, restricted its internal selling price inflation to 2.2% for the year compared with 2017, when it was 6.1%. And for the 33 weeks leading up to August 19 2018, MassMart reported an estimated product deflation of 0.5%.

Prices at Shoprite, Pick n Pay and MassMart are well below the consumer price index for food inflation of 5.9%.

But why did the growth of retail sales, as measured by StatsSA, slow down from 1.9% year on year in May to 0.7% in June?

Economists say the slower growth isn’t because of the VAT increase but is a result of the increases in fuel, electricity and water. Water costs increased by 11% year on year from 7.1% in June, and electricity price increases rose to 7.7% year on year from 3.1% the year before.

FNB economist James Muscat says the increase in water and electricity costs were “well above the average inflation number. This is a function of struggling state-owned enterprises passing costs on to consumers in an attempt to stay afloat.”

The annual fuel price inflation, currently at 24%, “is a negative blow to consumers’ wallets since petrol is a big share of households’ consumption basket, and it is a price inelastic good with no good substitutes as most car journeys are fairly essential,” Worthington says.

To top it all, the bad first quarter has been blamed on a weaker rand, exacerbated by United States President Donald Trump’s trade war.

Poor mining and manufacturing output added to the economy’s contraction, economists say. The listeriosis outbreak at the beginning of the year did not help retailers either.

Is the economy in recession?

John Ashbourne, an economist at Capital Economics, says the technical definition of a recession (two quarters of negative growth) “doesn’t line up very well with people’s lived experience”.

“The difference between a fall of 0.1% and growth of 0.1% is so small as to be almost meaningless from a practical perspective. The real story here is that the economy has had a very, very bad first half,” he says.

Economists are hopeful that the second quarter results will be better, although Muscat says a recession will be “avoided only by the slimmest of margins”. But FNB does not believe the third and fourth quarters will be as bad as the first, he says.

That does not necessarily hold for next year. Muscat says the retail sector will remain under pressure because he suspects a continued weak rand and elevated oil price will adversely affect disposable income (again), and water and electricity prices will be increased too.

“Given our fiscal deficit and the need to close it, it is almost certain that taxes will have to be increased at next year’s budget review, which again eats into disposable income,” says Muscat.

“Even if the fiscal adjustment were to come from the expenditure side, it means that there is less investment and job creation from government, which will hold back better consumption numbers. Also, the higher VAT rate is not going to go away.”

Gemma Ritchie

Gemma Ritchie

Gemma Ritchie works in the Mail & Guardian's online department. She majored in English Literature at a small liberal arts college in the USA.  Read more from Gemma Ritchie

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