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In terms of the outlook for consumers, there is reason for cautious optimism due to lower inflation and the potential for modest interest rate cuts.
In terms of the outlook for consumers, there is reason for cautious optimism due to lower inflation and the potential for modest interest rate cuts.

Breathing room for consumers?


Fin24 - Jun 27th 2017, 10:12

In terms of the outlook for consumers, there is reason for cautious optimism due to lower inflation and the potential for modest interest rate cuts, according to Dave Mohr (chief investment strategist) and Izak Odendaal (investment strategist) at Old Mutual Multi-Managers. 

They explain that inflation in May was 5.4% year-on-year. Food inflation, the main recent driver of high inflation, was 6.9% compared to a peak of 12% in December. Core inflation – excluding volatile food and fuel prices – was unchanged at 4.8%, close to the mid-point of the SA Reserve Bank’s target range.

"High inflation in the past two quarters was one of the key contributors to negative real consumption spending and therefore negative GDP prints. Receding inflation implies scope for increased real spending. Some – but not all - of this gain is likely to be taken away by SARS next year as the finance minister faces another tax revenue shortfall leading up to his first mini budget," they said.

"Household incomes are growing faster than debt (which is barely growing at all) and therefore households are de-gearing."

Mohr and Odendaal explained that, expressed as a percentage of household disposable (after-tax) income, household debt declined from a peak of 88% in 2008 to 73% in the first quarter. Put differently, the ratio is lower than a decade ago. The cost of servicing this debt (that is the interest burden) has stabilised at around 9.5% of income in the first quarter. It climbed by a full percentage point from 2014, eroding household spending power. In 2008 this ratio hit 14%, contributing to a deep consumer recession.

"With consumer confidence as low as it is, a rapid increase in borrowing is very unlikely. With households deleveraging, stable or lower interest rates over the next year imply a decline in this ratio, freeing up some room to spend, presuming income growth stabilises," they said.

Scope for interest rate cuts

Current cyclical conditions are calling for lower interest rates, according to Mohr and Odendaal. As measured inflation and most main inflation drivers are falling and the economic recovery increasingly at risk, the case for rate cuts is stronger, in their view.

"South Africa’s external vulnerability has also eased. New data from the Reserve Bank showed that the annualised current account deficit of R92bn (2.1% of GDP) in the first quarter was marginally higher that in the fourth quarter of 2016, but more than half of the 2014 level. A smaller current account deficit – which broadly measures our current liabilities with the rest of the world – reduces a key source of vulnerability for the rand," they explained.

"South Africa’s large ‘twin deficit’ (the combined fiscal and current account deficit) led to the country being considered as one of the ‘fragile five’ emerging markets (along with Turkey, Brazil, India and Indonesia). However, this deficit has declined from 10% in 2014 to 6%, removing one of the Reserve Bank’s reasons for maintaining relatively high rates." 

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