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Storm clouds are gathering and are about to burst for consumers, economists warned, after poor GDP data released this week confirmed that South Africa was in a technical recession.
Storm clouds are gathering and are about to burst for consumers, economists warned, after poor GDP data released this week confirmed that South Africa was in a technical recession.

Storm clouds gathering for SA consumers, economists warn

ECONOMIC NEWS

Fin 24 - Sep 11th 2018, 09:06

Storm clouds are gathering and are about to burst for consumers, economists warned, after poor GDP data released this week confirmed that South Africa was in a technical recession. 

Isaah Mhlanga, newly appointed Executive Chief Economist at Alexander Forbes, told Fin24 the recession was the result of a process already occurring - meaning South Africans had already been feeling the effects of soaring fuel and food prices and higher unemployment.

But the worst is still to come. For Abdul Aziz Davids, head of research at Kagiso Asset Management, the areas where consumers will feel the greatest pinch are further job losses; more expensive imported goods and services, including higher fuel and transport costs; and higher borrowing costs due to inflation and a possible downgrade by Moody’s.

Moody's already cut its estimate for South Africa’s 2018 GDP growth from 1.5% to between 0.7% and 1% after the country slipped into its first technical recession since 2009.

Echoing Davids's view, Mhlangu warned that in the absence of strong economic growth, unemployment will remain high, the cost of living will rise, the tax burden will get heavier and debt service costs (interest payments) will likely increase as the currency weakens and inflation increases.

Vicious cycle

Describing the stormy relationship between unemployment and low economic growth and the vicious cycle effect it has on consumers, independent economist Tinyiko Ngwenya said if the economy was not growing, corporates would not be earning enough to grow and employ more people.

Citing Shoprite’s reported drop in earnings for the first time in 20 years due to the challenging economic environment, she said if companies continued to see their earnings decline, it would be very difficult for them to hire staff and assist in solving SA’s unemployment crisis.

"Households cannot spend if they are not earning, and so a weak economy really adds pressure on the consumer, making it very difficult for them to make ends meet."

On interest rates, she said while the weaker rand and rising oil prices were a concern to the South African Reserve Bank, a weak economy would make the bank cautious about raising rates too soon.

"If the Reserve Bank raises interest rates at a time when household spending is already declining, then a rate increase will add even more pressure to an already constrained consumer."

Contextualising the recession, Mhlanga said effectively, the poor state of the economy was a home-grown problem "because the rest of the world, emerging markets and Sub-Saharan Africa’s growth has been improving while SA has been limping".

However, he said there has been significant work and changes made since the beginning of the year.

"Changes in boards and leadership at no less than five SOEs, a US$100bn investment drive which has already attracted US$35bn in pledges, and the upcoming jobs and investment summits all point to efforts to turn around the economy."

"These will ensure that we arrest the economic decline and set a base from which to grow. But for that to happen, more needs to be done."

A new way of doing business

Meanwhile, Davids said the best way for consumers to weather the storm was to try to play down debt and any fixed financial commitments as soon as possible, thus saving on future higher borrowing costs.

"Furthermore, consumers should cut back on non-essential spending and thereby try to increase savings, because the storm clouds are gathering, and are about to burst."
Fin 24 

Read more about: sa economy | recession | gdp | business

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