Consumers will need to continue to “create their own luck” in 2017 despite some likely improvement in the economy

Posted On Monday, 09 January 2017 12:47 Published by
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While economic growth is expected to be mildly better in 2017, this is not yet expected to be enough to turn Real Household Disposable Income growth positive on a per capital basis.


We believe, therefore, that the Household Sector should continue to “create its own luck” by taking steps to further reduce its financial vulnerability. A key positive step in this regard is the further lowering of the Debt-to-Disposable Income Ratio, which we expect to happen. The ongoing dismal household savings rate continues to concern, however.

In recent months, there have been signs of a mildly stronger global economy, and with it stronger commodity prices, which lead to the possibility of some strengthening in South Africa’s economic growth during 2017. These signs have shown in the Leading Business Cycle Indicator of the SARB (South African Reserve Bank, whose year-on-year rate of change has turned from negative rates as low as -4.9% in April 2016 to a positive +1.3% by October 2016.

The Leading Indicator can be a useful indicator of near term economic performance (although not an exact science), and having moved up into positive ear-on-year growth territory in recent months (for the 1st time since September 2013), 2017 may just see a turn for the better in the economy. And indeed, FNB is projecting a 1% real economic growth rate for 2017 as a whole, following on a growth rate that was likely to have been very near to zero in 2016.

Improved global economy and commodity prices aside, we also await some improvement in agriculture performance should drought conditions alleviate sufficiently, although it is not yet clear to what extent this has happened to date, with large parts of the country still suffering from water shortages.

Furthermore, we expect CPI inflation to return to the 3-6% target range in 2017, after an expected average rate in the region of 6.3% for 2016 as a whole. Slowing food price inflation, off a very high base, is key to this assumption, as is less of an average Rand depreciation for the year following on quite a significant weakening in the average annual Dollar/Rand Exchange rate in 2016 compared with 2015.

More mildly positive news for the consumer is expected to come in the form of sideways movement in interest rates for the entire year, at a level where Prime Rate remains at 10.5%.

But despite the possibility of a slightly improved economic outlook, consumers would do well to continue to “create their own luck”, as they have been doing in recent years.

By “creating their own luck”, I am referring to a highly positive development in the form of a gradual decline in the Household Sector Debt-to-Disposable Income Ratio spanning all the way from 2008 up until the most recent data estimates for the 3rd quarter of last year. From an all-time high of 87.8% as at the 1st quarter of 2008, the Debt-to-Disposable Income Ratio had declined all the way to 74% by the 3rd quarter of 2016, according to the SARB. Whether it was due to cautious household borrowers or to banks’ lending criteria or both is largely immaterial.

The multi-year decline in this ratio has significantly reduced the level of Household Sector vulnerability to economic and interest rate shocks since 2008. This is a key reason why to date the levels of consumer financial stress do not appear to have reached anything near to those of 2008/9 around the time of the last recession (especially in the area of mortgage debt).

Admittedly, the other reasons are that the economic slowdown to date has not been as severe as that sharp slowdown of 2008/9, nor has the interest rate hiking cycle been of the same magnitude as that of 2006-2008. But lower indebtedness relative to disposable income is nevertheless key in lowering consumer vulnerability, and we would like to see more of the same in 2017, because despite expectations of economic improvement, the South African consumer is certainly not out of the woods yet.

Key Consumer Risks:

•             Taxation

A 1% real economic growth rate does not guarantee a 1% Real Disposable Income growth rate. The weak economy of recent years has taken its toll on government tax revenue, and the Minister of Finance is looking for areas to boost revenues. Personal income tax has been a popular source of additional revenue in recent years, with Treasury effectively raising personal tax rates through not fully adjusting tax brackets for inflation bracket creep. And so, whereas in 2004 personal and wealth taxes on households were estimated at only 10.9% of household income, by 2015 this percentage had risen to 15% (from 14.4% in 2014), and we would expect further increase in the 2016 numbers and in 2017.

•             Employment

In addition, employment trends tend to lag economic growth trends. Therefore, while economic growth may turn the corner mildly after a multi-year stagnation up until 2016, it is not that clear that the recent declines in employment are finished just yet. Given that the domestic wage bill has grown at a faster rate than GDP for some years, eating into the country’s operating surplus, it seems that either wage increases need to be contained or employment numbers may disappoint. Either way, that seems like a significant constraint on the consumer to come, and consumer financial constraints have already been seen in weak retail sales growth numbers late in 2016.

•             Negative Per Capita Real Disposable Income Growth

Furthermore, a near 1% growth rate in Real Household Disposable Income would not represent positive growth in per capita terms. With population growth estimated at around 1.3% as at 2015, and gradually accelerating, we believe 2016 per capita economic and real household disposable income growth may have already sunk into negative territory, and our projected growth rates for 2017 would translate into further negative growth this year.

The implications of negative per capita Household Disposable Income growth can go beyond merely posing spending constraints for the Household Sector to further fueling social tensions and political volatility. This can be significant in a year which will end with the ruling ANC’s elective conference. And while it is virtually impossible to predict political events that may unfold, the build up to the conference through the year will no doubt be watched closely by the investor community, and any major negative political events can influence investor confidence and the rand, posing risks to any economic forecast.

Therefore, in 2017, the Consumer Sector would probably be wise to continue to “make its own luck”, and not bargain too heavily on major benefits from any possible economic improvement just yet. We do expect household credit growth to remain subdued through the year at rates where we could see further gradual decline in the Household Sector Debt-to-Disposable Income Ratio. That would be a key positive development from a financial health point of view.

However, what we are not seeing yet is any meaningful improvement in the Household Sector Savings Rate. The Net Savings Rate (Gross Savings net of Depreciation on Fixed Assets) has improved from multi-year lows of -2.3% of Disposable Income to less negative rates in recent quarters. But at a still-negative -0.8% of Disposable Income in the 3rd quarter of 2016 (weaker than the prior quarter’s -0.6%), there is little yet to enthuse about on the household savings front.

Given that asset price growth is not setting the world alight of late, the drive in 2017 should be for a significantly higher savings rate.

Last modified on Monday, 09 January 2017 12:54

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