South African consumers are facing a myriad of challenges at the start of 2022, including rising inflation and a petrol price recently breaking the R20/litre level.
The economy has also not fully recovered from the Covid-19 pandemic as many other countries have been able to, and is expected to only return to 2019 levels by 2023/24, says Bernard Drotschie, chief investment officer at investment firm, Melville Douglas.
“This can be explained by the weak state of the economy going into the crisis and a lack of sufficient fiscal support – given the indebtedness of the country,” he said.
“Load shedding, social unrest during the third quarter of last year, weak confidence and the government’s inability to implement large-scale reforms have also held back growth during the past year, while low-interest rates have provided some support to households and consumer spending.”
The Omicron variant has also clearly had an impact on consumer confidence levels across the world and the non-tradable services sector, including tourism and leisure, was once again hit hard as many foreign tourists had to cancel their travel plans to South Africa during the busiest time of the year for the industry, he said.
In addition, the slowdown in China is influencing export volumes while global supply chains are still not functioning at levels anywhere close to historic trends, affecting industrial production and the ability of South African companies to source enough products to meet demand.
“But more concerning is the dire state of our employment market, with unemployment reaching unpalatable levels,” said Drotschie.
“South Africa’s GDP growth is expected to return to trend, which is currently approximately 2% – without structural growth reforms. This is nowhere near the level needed to make a dent in the worsening unemployment situation.”
While these trends pose a real threat to the country’s long term socio-economic stability, total household income (in nominal terms) paints a slightly rosier picture as it has made a full recovery since the onset of the pandemic, Drotschie said.
“The improvement in total compensation is confirmed by data from the South African Revenue Service, which indicated that employee tax receipts for the first 11 months of 2021 were 5% ahead of the run rate achieved during 2019.
“In real terms, adjusting for inflation, income levels are, however, still lagging and will pose a headwind to the current momentum in consumer spending should the services sector not rebound as widely expected.”
Reforms
In addition to slowing growth, monetary policy is expected to gradually tighten, and fiscal support will fade as the country’s balance sheet and debt ratios remain stretched, with ever-increasing debt-service costs preventing the government from providing much additional support to the economy, said Drotschie.
“Government is however adamant to redirect its spending more towards productive assets and will continue its journey of fiscal consolidation and greater collaboration with the private sector to help fund the various growth plans in the pipeline such as the generation of renewable and more sustainable energy.
“Execution risks remain, but the tax revenue windfall from strong corporate profits achieved by the mining sector and an improvement in tax collections by SARS have bought government some short-term relief.”
The importance for the government to follow through with their well-documented growth reform plans while getting rid of corruption within government entities cannot be overemphasised, he said.
“The report from the Zondo commission exposed those that profited from state capture during president Jacob Zuma’s reign, and it is important that these individuals are taken to task.
“The good news for investors is that little of the potential uplift in the country’s long-term growth trajectory has been discounted in asset valuations domestically, which is different to what we are seeing in certain offshore markets such as the US.
“But attractive valuations on their own will not be enough to sustain the strong returns that have been experienced more recently. In the end, profitable growth is what matters,” he said.
Read: Eskom CEO on the load shedding outlook for South Africa
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