Hard times ahead for consumers in South Africa

The high inflation and interest rate environment in South Africa is eroding households’ disposable income, which requires consumers to spend a larger portion of their disposable income on non-durable goods – food, and petrol as opposed to durable goods like furniture and vehicles, says Sanisha Packirisamy, an economist at Momentum Investments.

The financial services firm said that it expects consumer confidence among high-income earners to remain relatively subdued in the coming quarters given the current environment of high interest rates, which negatively affect earnings, equity prices and consequently household wealth.

“Additionally, housing prices are negatively affected by the monetary tightening cycle since the resulting environment lowers the demand for owning property because owning becomes more expensive and renting becomes a more attractive alternative.”

Low-income households are showing signs of being more optimistic than medium – and high-income households, said Packirisamy. This is likely on the back of government support while higher mortgage rates are negatively affecting higher-income households.”

The number of jobs created for semi-skilled and non-skilled individuals during the last three quarters recorded an average growth of 1.9%. “This has had a positive impact on household income and the magnitude of low-income households’ confidence levels,” said Packirisamy.

“However, in our view, structurally high unemployment will constrain confidence in the long run,” the economist warned.

Statistics South Africa last week reported that GDP contracted 0.7% in the three months through June, compared with downwardly revised growth of 1.7% in the previous quarter.

South Africa’s central bank governor, Lesetja Kganyago, meanwhile, said in an interview with Bloomberg, that it’s too early to call the peak of inflation that’s running at its fastest pace in 13 years.

“Until the public can see that now inflation is definitely on a downward trajectory, it is too early to call the peak,” Kganyago said.

Until “we feel that inflation is now under control and is on a downward trajectory towards where we want, which is the mid-point of our inflation targeting range” the bank must do whatever it takes to nip inflation in the bud, he said.

Packirisamy said that the year-to-date retail trade sales indicate that consumers are in necessity mode and cutting back on discretionary spending despite possible higher incomes from positive jobs growth and higher wages.

The economist said that the Consumer Confidence Index (CCI) outcome remains weak relative to history, suggesting a negative outlook for consumption expenditure in the coming quarters.

“We expect structurally high unemployment, higher inflation, a further increase in interest rates and lower asset price inflation to weigh negatively on consumer sentiment. Consequently, we expect growth in household consumption to slow from an expected 1.9% this year to 1.5% next year.”

Momentum said it anticipates further rate hikes by the Monetary Policy Committee (MPC) of 75bps in September 2022 and another 50bps in November 2022, and we expect these rate hikes to lead to an increase in the debt service cost ratio in the coming months.” This will consequently dampen households’ expected financial position and consumer sentiment in general, it said.

This sentiment was echoed by economists from the Bureau of Economic Research (BER), who also revised their interest rate projections for September to 75bps up from 50bps before.

Eskom

Adding to any irritable feelings towards the state of the country, Eskom’s state of operation continues to pull at the threads of the country’s collective sanity.

Eskom said in a note on Monday (12 September), that it has returned at least 37 generation units to service following what chief operating officer (COO), Jan Oberholzer, called a “disastrous week” for the power utility.

Eskom announced that Stage 2 load shedding would be implemented throughout the week. However, the breakdown of some 42 generation units quickly escalated load shedding to Stage 4 by Saturday.

Oberholzer, together with Eskom management, briefed the media on Monday morning on the state of the power system and the challenges it faces.

Describing a week in which Eskom suffered generation unit breakdowns and slow returns to service, Oberholzer acknowledged that the “performance of generation…is extremely disappointing”. “If you add all of the [generation unit breakdowns] up, we had 42 units tripping during the week… just under 24,000 MW – some of them more than once.

“We managed to return 37 units [to service], totalling about 22,000MW – a really poor performance of our generation coal fleet during last week,” he said.

Stage 3 load shedding will remain implemented until 05h00 on Tuesday morning. For the remainder of the week until midnight on Friday, Stage 2 load shedding will be required while we attempt to return those 13 units to service, Oberholzer said.

Read: Perfect storm brewing for South Africa as load shedding intensifies