Finally, there are growing indications of the recovery in consumer spending we long foresaw as likely in the second half of this year after marked weakness last year and a contraction in real (inflation-adjusted) total consumer spending in the first quarter of this year. Though it is to be expected that the data will be mixed around such a turning point, consumers have likely turned the corner.
While the latest retail sales volumes over the past week may have undershot the average forecast by economists polled by Bloomberg by sliding marginally in July (by 0.2% from June), sales volumes were still 2% higher than the same time last year (which is double the average growth in the first half of this year). Standard Bank clients’ spending and income have also been slightly more robust recently after marked weakness in the first months of this year.
The substantial improvement in consumer confidence, reflected in a 15-point bounce (on a scale of -100 to +100) in the consumer confidence index (released last week) from last year’s average, underscores the improvement in consumer sentiment. Changes in the consumer confidence index tend to coincide with changes in consumption, which should similarly improve further in the third quarter. The improvement in consumer confidence resonates with a bounce in retailer business confidence for the third quarter, which, after a 6-point increase (on a scale of 0 to 100), exceeds its post-1994 average.
The recent support for consumption stems largely from softer inflation, which has plunged by nearly 1-percentage point over the past three months (from May to August, the latest data available). Amid relatively stable wage growth, this has been boosting real spending power significantly. The disinflation partly stems from the sharp decline in fuel prices, with a further decline in September (not yet incorporated into the latest CPI data for August) and a likely plunge foreseen in October (based on the average over-recovery in fuel prices of more than R1/litre).
After the recent steep decline in fuel prices we expect a sizeable dip in consumer inflation in the next two data sets (for September and October), towards the bottom part of the South African Reserve Bank’s 3-6% inflation target range. There might be some fluctuations in fuel prices (from oil price and/or currency fluctuations) after the steep decline — but prices should remain relatively subdued. An even more pertinent downside risk to the inflation forecasts stems from the resilience, and possibly even further strength, of the rand exchange rate.
Our analysis of Standard Bank clients’ spending data shows a saving of 1% of total spending relative to a year ago from the aforementioned fuel cost savings, with further (fuel) savings on the cards. Interestingly, our proprietary data shows that these savings have been used to increase spending on a wide range of items, ranging from restaurants and food to beauty products. There should also be a boost from the “two-pot” retirement reform that was implemented at the beginning of September, which allows partial withdrawal of individuals’ retirement savings.
As is often the case, though, the improvement is proving uneven. The second quarter data from one of the credit bureaus shows an encouraging increase in the proportion of credit-active individuals without any accounts in arrears, which for the first time has exceeded where it was at the beginning of 2019 (ahead of the Covid-induced slump in 2020). However, our interpretation of this data set is an increase in the arrears of consumers with overdue debt. This is, notably, not only the case for lower-income groups but also for higher-income groups (though their arrears are proportionately lower than lower-income groups). We suspect that the financial pressure among the high-income groups may relate at least partly to the sharp decline in dividends paid out by companies, which is a major source of income for most of the top-income group.
Of course, the next source of relief for individuals is the interest rate cutting cycle on which the Reserve Bank, unsurprisingly, embarked this past week. We still expect a shallow rate cutting cycle of only around 1% (cumulatively), which would provide relief to borrowers rather than presenting any strong stimulation. Ultimately, there may be scope for a slightly deeper interest rate cutting cycle if the above-mentioned downside risks to the inflation forecast trajectory materialise. This, however, would need to be much more than merely a deeper moderation in near-term inflation. It would also require the medium-term inflation forecasts trending materially below the 4.5% midpoint of the inflation target.
Despite its preference for a lower target, we expect the Reserve Bank to stick to targeting 3%-6% inflation, with a symmetric focus on the midpoint of this target until there is a formal adjustment of the target. Consumers can thus just afford to breathe a sigh of relief for the moment.
• Dr Moolman is head of South African macroeconomic research at Standard Bank Group.
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