File photo by Delwyn Verasamy/M&G
Consumer spending is likely to be subdued on Black Friday as household finances remain under pressure from a generally high cost of living despite two interest rate cuts this year as well as lower food and fuel costs, economists say.
Although inflation has been trending down, consumers still have to contend with the high prices that have been built over the last year when the rate was going up, said Alec Abraham, a senior equity analyst at Sasfin Bank.
“They’re not going up significantly further, but we are still at very high price levels, paying for groceries or whatever, than we did a year or year and a half ago and that absolute increase really is putting a lot of pressure on discretionary spending,” Abraham told the Mail & Guardian.
“The main things are the local fuel price and and the lower interest rates, because those actually put more money in your pocket than you had last month.”
Inflation retreated for the fifth consecutive month in October to 2.8% year-on-year from 3.8% in September, largely on the back of the decrease in fuel prices, according to Statistics South Africa. Added to that, the South African Reserve Bank has cut interest rates by a cumulative 50 basis points this year, leaving the benchmark repo rate at 7.75%.
Abraham said general dealers, such as PicknPay and Checkers, are likely to take the lion’s share of Black Friday spending as consumers shop for food and other groceries, ahead of Christmas.
A source for Black Friday spending money could be withdrawals from the two-pot system, said Momentum economist Sanisha Packirisamy. The system, which commenced on 1 September, gives members of retirement funds access to savings, while ensuring that they preserve the majority of the money for retirement.
Packirisamy noted that the Reserve Bank had shifted its expectations around withdrawals from the two-pot system and now expects 75% to go towards consumption and only 25% to be spent on debt reduction.
“The initial assumption on what two-pot could do for consumption is now actually higher on the back of, firstly, more withdrawals but also a higher assumption of what’s actually going to go through to consumer spending, rather than towards debt reduction,” Packirisamy said.
According to the South African Revenue Service, as of October the total gross lump sum paid out in two-pot withdrawals was R21.4 billion.
But consumer spending for Black Friday is not going to be massive, Packirisamy predicted.
“It’s been such a tough year for the consumer, they’re not firing on all cylinders,” she said, noting that the job market is “still quite bleak for your unskilled, semi-skilled workforce”.
“We know that employment has been quite static in the last while, so we’re seeing some employment growth at the top end of the market, where you’ve got your managerial professional staff, but if you look at your unskilled and your semi-skilled workforce, employment growth rates are still reasonably weak, something that will constrain spending at some end of the market.”
The unemployment rate for the third quarter eased to 32.1% after hitting a two-year high of 33.5% in the second quarter, according to Stats SA, but about 8 million people in the labour market still remain jobless.
Data from Sasfin shows that consumers delay October spending to take advantage of November specials, which are available in apparel retailers, general dealers and household furniture and equipment stores.
“I believe that retailers have become more calculated in their promotions to try to ensure decent profitability out of the Black Friday promotions, rather than getting sales ‘at all costs’, as in the early days of the phenomenon.
“I think that reflects the constrained nature of disposable income in South Africa,” Abraham wrote in a note.
“Most South African consumers don’t have the financial flexibility to ramp up purchase volumes at will; which speaks to the substitution of October sales for promotion-led November sales.
“This is particularly true of discretionary retail categories. Having said that, the fact that this substitution is also evident for general dealers (food and grocery retailers) hints at the financial strain of South African consumers seeking to maximise their limited buying power for even essential items.”
Consumers across the board would be seeking Black Friday discounts, Abraham told the M&G. “It’s not only the lower-income groups. It’s middle-income as well, because they’re also affected by high interest rates and everything else.
“And with the rates coming down, they’ve got a little bit more firepower. So, certainly, middle income definitely gets caught up in that as well.”
Consumers are choosing to spend on consumable items, rather than durable ones, Packirisamy observed.
“The consumer will rather keep their microwave for another year, simply because they’re so stretched in terms of their finances. So, I think that element is still probably going to come through,” she predicted.
“We’ve seen from the retailers that clothing spending has been quite weak. So you’ve seen quite a bit coming through on your non-durables, which is your food and grocery kind of spend. I think on your durable side, it’s still going to be a little bit slow.”