Economics Weekly
What the latest Quarterly Bulletin tells us about the consumer
Yesterday, the South African Reserve Bank released the 1Q23 Quarterly Bulletin, providing more clues about the state of the consumer. Below, we unpack some of these.
Income support still outside the labour market
Household income continued to find support from non-labour income (approximately 30% of household disposable income), which increased by approximately 22% y/y in 1Q23 (Figure 1). This is on the back of robust interest income, which is benefitting from the high-interest rate environment, as well as some support from dividend payouts. For most consumers, however, income growth remains weak and unable to keep with inflation. Compensation of employees (or labour income, 70% of household income) increased by 3.8% y/y in 1Q23, versus 7.0% inflation in that quarter. As of 1Q23, surveyed expectations for wage increases averaged 5.3%, versus our inflation forecast of 6.2%, implying little reprieve ahead. Nevertheless, real wage growth in some sectors should be better supported, the latest government wage settlement of 7.5% being one example.
Contained household indebtedness, but peculiar borrowing patterns
Despite these income pressures, household indebtedness remains contained relative to recent history. The household debt-to-income ratio ticked up marginally to 62.1% in 1Q23 from 61.6% in 4Q22, as debt accumulation outpaced income growth. Still, the current debt-to-income ratio is 16 percentage points lower than the Global Financial Crises peak of 78.1% in 1Q08. What is concerning is that underlying credit data is showing signs of cracks, at least in certain pockets. Debt accumulation in 1Q23 was largely driven by unsecured credit, both in the bank and non-bank sectors (Figure 2). Our analysis of the National Credit Regulator's (NCR) data (see here) showed that the robust lending activity by non-banks was mainly driven by credit facilities, particularly store and ("independent") credit cards. In the bank sector, activity was spearheaded by general loans and credit card demand. More recently, however, the extension of unsecured credit by banks appears to have plateaued, although credit cards continue to accelerate (Figure 3). In our view, the increased reliance on unsecured credit in part reflects household investment into alternative energy sources. However, it also likely reflects financial strain, with households resorting to pricier forms of credit to mitigate short term cash-flow constraints.
The combination of a rising debt-stock and higher interest rates weighed further on consumer discretionary income. Debt-servicing costs, as a percentage of disposable income, ticked up to 8.4% from 7.9% in 4Q22 (Figure 4). We should see debt-servicing costs continuing to increase in the coming months, as interest rate hikes filter through, and consumers grapple with pricier forms of credit.
Positively, however, household net wealth increased in 1Q23 as the market value of total assets increased more than that of total liabilities. The higher value of assets resulted from an increase in the value of housing stock and share prices, as the FTSE/JSE All-Share Index (Alsi) increased by 4.2%, while the FNB HPI suggests only a marginal increase in the value of housing stock in 1Q23.
Looking ahead
We expect that households will find less support from the credit market as lending standards tighten. The contained income growth, as well as the escalated living and debt-servicing cost environment all raise risks of distressed borrowing and credit defaults. These are more amplified in the non-bank sector (where credit checks are generally less robust) and among lower income segments. In turn, this may delay the recovery in consumption growth even when interest rates start to decrease, as consumers take time to repair their credit records. That said, the aggregate indebtedness level remains in check, affirming our view that the risk distribution is uneven across consumer segments. Overall, we expect household consumption growth to moderate to 0.8% in 2023, from 2.5% last year, before a meagre recovery to 0.9% in 2024 and 2025, respectively. A more robust labour market and swifter-than-expected monetary policy easing could provide much needed support.
Week in review
Employment in the formal non-agricultural sectors of the economy contracted by 21 000 jobs or -0.2% q/q in 1Q23. Many of the jobs that were shed were in trade, in line with post-festive season layoffs. Relative to a year ago, employment has fallen by 97 000 jobs or -1.0%, reflecting a weakening economy. Furthermore, the recovery in employment remains incomplete, with employment still lower by 259 000, or 2.5% compared to 1Q19. Total gross earnings declined by 4.0% q/q but are 5.5% higher than a year ago and have firmly surpassed 1Q19 levels by 18.6%. Sticky inflation and tighter financial conditions should slow global activity this year. This, along with local energy and logistical constraints, are likely to impede employment prospects. Furthermore, the lift in the local cost of doing business should weigh on profitability and wage bargaining. While the recovery in earnings has outpaced that in employment, these headwinds should constrain growth in both measures in the near term. Over the longer term, continued investment in alleviating productivity constraints should usher in more robust economic growth and support more broad-based and inclusive employment growth.
The FNB/BER consumer confidence index (CCI) slipped further to -25 index points in 2Q23. This is after plunging to -23 points in 1Q23 from -8 points in 4Q22. This reading was the second lowest since 1994 and suggests mounting consumer concerns regarding economic prospects and their finances. This is more pronounced for higherincome households, those with stronger balance sheets and greater spending power, likely reflecting concerns around electricity shortages and SA's foreign relations amongst other things. Fears about SA's near-term prospects and dwindling affordability likely contributed to consumer unwillingness to spend, particularly on discretionary items, and should result in slower household spending growth.
Producer price inflation slowed to 7.3% y/y in May from 8.6% y/y in April, partly driven by a higher base from last year. Producer prices increased by 0.6% m/m after remaining flat (0% m/m) in April. Excluding petroleum-related product prices, producer inflation measured 8.5% y/y (from 9.1% y/y) and 0.7% m/m (from 0.4% m/m). Intermediate producer price inflation, a measure of product prices as they enter the production process, continued moderating, falling to 4.4% y/y in May from 4.6% y/y in April. Yearto- date (January - May) producer inflation has averaged 10.2% y/y, marginally lower than the 12.1% y/y average over the same period last year. We maintain that producer price inflation should continue moderating and average around 7.0% this year, from 14.3% last year, partly assisted by base effects, improving supply chain conditions, and softening domestic demand. However, persistent load-shedding and a weaker domestic currency imply that the moderation in producer inflation may be slow.
Private sector credit extension (PSCE) slowed to 6.8% y/y in May from 7.1% in April. The slowdown reflected a moderation in both corporate and household credit. Corporate credit growth slowed to 6.9%, from 7.1% previously, dragged down by general loans and mortgage extension which slowed to 7.2% and 6.2%, from 10.5% and 6.5% respectively in April. Supporting corporate credit were instalment sales, which quickened to 13.9% from 13.2% previously, and investments, which recovered to 3.0% from a 11.7% decline. Credit extended to households slowed to 6.7% in May, from 7.0% in the previous month, dragged lower by asset-backed credit, which slowed to 6.4% from 6.7%. This was due to slower uptake of car and housing finance in May, as activity in these markets continues to soften. Unsecured credit was relatively unchanged at a still robust 7.9%. Nevertheless, unsecured credit has cooled in recent months, coming off a peak of 10.2% in January 2023. We expect PSCE to continue slowing, as the impact of interest rates hikes filters through, and lending standards tighten.
After improving for the last year, the FNB/BER Civil Confidence Index edged one index point lower to 41 in 2Q23. This is still in line with the long-term average for the series of 42. While sentiment moved sideways, the pace of the recovery in civil construction activity quickened in 2Q23, with the index measuring activity growth reaching its highest since 2007. Part of this is due to increased public sector projects related to road and water infrastructure, as well as the development of alternative energy infrastructure by the private sector. Disappointingly, overall profitability worsened, weighed on by factors such as increased input costs and continued margin pressure, which is not uncommon so early in a recovery. Overall, broader concerns about impediments to economic activity, a much weaker rand (at the time of the survey), and diplomatic missteps likely contributed to the relatively subdued sentiment, given notably better activity. Importantly, the survey indicates that construction work will remain well supported into the following quarter.
Week ahead
On Monday, the Absa manufacturing PMI data for June will be released. The PMI declined to 49.2 index points in May, from 49.8 points in April. Business activity and new sales orders remained in contractionary territory, reflecting an unfavourable operating climate for manufacturers. Indications of weaker business activity during the first two months of 2Q23 versus 1Q23 point to less impetus to GDP from the manufacturing sector. Furthermore, expectations for near-term conditions were more pessimistic, likely in anticipation of intensified load-shedding during the winter months, which would compound rising cost pressures given a weaker exchange rate.
Also on Monday, the Naamsa new vehicle sales data for June will be published. Total new vehicles sold were 43 060 in May, a surge of 3 959 units or 10.1% y/y. This followed meagre growth of 0.1% y/y in April. On a month-on-month basis, aggregate sales recorded robust growth of 15.6%. Growth reflected improved performance in commercial vehicle sales, while the passenger car market has shown signs of strain. Light commercial vehicles grew 38.5% y/y, medium commercial vehicles by 2.7% y/y, and heavy commercial vehicles by 19.3%. New passenger car sales growth was muted at 0.1% y/y. While commercial vehicle sales indicate a continued replacement cycle by business, passenger car sales show slowing demand following the recent uptick in household buying activity as well as the tourism-related replacement cycle. Rising interest rates have compounded pressure on households, which is also reflected in slowing instalment sales credit uptake, and a weaker exchange rate should worsen affordability. In general, domestic economic prospects have deteriorated and should weigh on buying activity going forward.
On Thursday, the BER inflation expectations survey results for 2Q23 will be published. The inflation expectations survey results for 1Q23 showed a continued lift in expected inflation. Inflation expectations for 2023 lifted to 6.3% from 6.1% previously, and 2024 expectations edged up to 5.8%, from 5.6% previously. Two-yearahead inflation expectations settled at 5.5%, a full percentage point above the SARB's preferred anchor of 4.5%. Five-year-ahead expectations remained unchanged, also at 5.5%. This indicates that price-setters still see inflation remaining above target over the policy transmission and medium-term horizon, which would be unsettling for the Monetary Policy Committee. In line with this, we anticipate that interest rates will remain higher for longer to avoid a sustained de-anchoring of expectations and to tame structural inflation.
Also on Thursday, data on electricity generated and available for distribution for May will be released. Electricity production (not seasonally adjusted) declined by 8.6% y/y in April, marking nineteen consecutive months of annual decline. Seasonally adjusted electricity production shrank by 4.3% in April, more than reversing the 4.0% monthly expansion in the prior month. Electricity consumption declined sharply by 8.1% y/y and 4.6% m/m (seasonally adjusted) in April. The weakness in the electricity sector marked a weak start in the second quarter and generally aligns with expectations of sluggish growth this year.
On Friday, data on SA's foreign exchange reserves for June will be published. Gross foreign exchange reserves decreased to $61.30 billion in May, from $61.72 billion in April. The decline reflects a lower dollar-denominated gold price, government-related foreign exchange payments, as well as valuation adjustments given a stronger US dollar and asset price changes.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 27 Jun | SA | Quartely Employment Statistics y/y | 1Q | -0.2% | 0.7% |
| 29 Jun | SA | FNB/BER consumer confidence index | 2Q | -25 | -23 |
| SA | PPI m/m | May | 0.6% | 0.0% | |
| SA | CPI y/y | May | 7.3% | 8.6% | |
| 30 Jun | SA | Private sector credit extension y/y | May | 6.8% | 7.1% |
| SA | FNB/BER civil confidence index | 2Q | 41 | 42 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 30 Jun | SA | Trade balance (Rand billion) May 6.0 | May | 6.0 | 3.5 |
| SA | Monthly Budget Balance (Rand billion) | May | -18.7 | -67.5 | |
| 3 Jul | SA | Absa Manufacturing PMI | Jun | 49.2 | |
| SA | Naamsa Vehicle Sales y/y | Jun | 10.1% | ||
| 5 Jul | SA | S&P Global South Africa PMI | Jun | 47.9 | |
| 6 Jul | SA | BER Inflation Expectations Survey | 2Q | ||
| SA | Electricity Consumption y/y | May | -8.1% | ||
| SA | Electricity Production y/y | May | -8.6% | ||
| 7 Jul | SA | Gross Reserves ($ billion) | Jun | 61.3 |
Financial market indicators
| Indicator | Level | 1W | 1M | 1Y |
|---|---|---|---|---|
| All Share | 74,892.51 | -0.3% | -2.2% | 10.5% |
| USD/ZAR | 18.76 | 1.3% | -4.6% | 15.6% |
| EUR/ZAR | 20.39 | 0.5% | -3.2% | 20.2% |
| GBP/ZAR | 23.67 | 0.3% | -2.6% | 20.4% |
| Platinum US$/oz | 898.96 | -2.8% | -12.6% | -2.2% |
| Gold US$/oz | 1,908.20 | -0.3% | -1.8% | 5.0% |
| Brent US$/oz | 74.34 | 0.3% | -3.5% | -36.1% |
| SA 10 year bond yield | 10.49 | -1.8% | -5.5% | 0.8% |
FNB SA Economic Forecast
| Economic Indicator | 2021 | 2022 | 2023f | 2024f | 2025f |
|---|---|---|---|---|---|
| Real GDP %y/y | 4.7 | 1.9 | -0.1 | 1.1 | 1.8 |
| Household consumption expenditure % y/y | 5.8 | 2.5 | 0.8 | 0.9 | 0.9 |
| Gross fixed capital formation % y/y | 0.6 | 4.8 | 4.2 | 3.0 | 4.2 |
| CPI (average) %y/y | 4.5 | 6.9 | 6.2 | 5.5 | 5.0 |
| CPI (year end) % y/y | 5.9 | 7.2 | 5.6 | 5.0 | 5.0 |
| Repo rate (year end) %p.a. | 3.75 | 7.00 | 8.50 | 8.25 | 7.00 |
| Prime (year end) %p.a. | 7.25 | 10.50 | 12.00 | 11.75 | 10.50 |
| USDZAR (average) | 14.80 | 16.40 | 18.80 | 18.00 | 17.50 |
Source: FNB
