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Consumer Trends 21 February 2019

2019 Consumer Wallet

Executive Summary

We create consumer wallets for 8 income categories broadly categorised as low, middle and affluent income earners. Each income groups wallet is composed of spending on essential and non-essential goods and services. We again rely on comprehensive and independent household-level data from the Bureau of Market Research (BMR). We forecast the household sector to again drive growth in 2019 despite the inherent economic headwinds as well as the larger-than-expected increase in fiscal drag as per the 2019 national Budget. Understanding spending patterns is therefore important as it helps in understanding how households are affected by, and can respond to the economic environment. 

Consumer headwinds in SA’s challenging economic environment:

Ahead of the SA elections: H1:19 uncertain, and Eskom weighs on sentiment

There are global growth concerns as well as idiosyncratic local risks in H1:19 stemming from political/policy uncertainty ahead of the general national elections. Further, load-shedding by Eskom may weigh on growth. Some local idiosyncratic risks include NERSA’s decision related to Eskom’s tariff application in March (although this has been partly mitigated by funding announcements for Eskom in the 2019 Budget), a negative credit rating action (not our base case) by Moody’s on March 29, local policy uncertainty (land expropriation without compensation) and the 2019 national election.

However, some support is expected from lower oil prices, base effects, and stronger support from household credit growth. Further, if in H2:19 there is sufficient ANC electoral support to allow for deeper economic reforms and pragmatic policy (such as on land expropriation without compensation), there may be an uptick in formal employment and fixed investment, which could aid growth.

Apart from the politics and policy uncertainty:

There is also a concern about the extent to which structural and capacity constraints, not just political and policy uncertainty, are holding down economic growth. Most sectors in the economy remain constrained or are trending side-ways.

While the consumer is expected to play a crucial role in the economy this year, yesterday’s 2019 Budget has been a negative setback for consumers particularly in the middle income segments. This is due to the unexpected significant fiscal drag across the income spectrum (which government expects will be worth around R12.8bn; this is around 0.4% of total annual nominal household consumption expenditure (HCE)).

Income growth remains poor, given poor labour market conditions. Consumer confidence indicators show consumers hoping for an improvement in economic conditions but remaining reluctant to buy durable and/non-essential goods. While we expect confidence to trend upwards, we expect spending in this category to remain subdued.

However, positive policy/economic reform could help employment, especially in an election year. It is our view that household deleveraging has stalled, which should also aid spending from the ongoing acceleration in household credit. Consumer momentum will also likely take direction mostly from inflation (which is expected to remain benign), flat interest rates and income growth trends, possibly with auxiliary support from credit growth.

Consumer wallet findings:

Low income groups

  • This group comprises the largest share of the population but has the lowest spending power.
  • Big expenditure moves come from essential items such as ‘taxi and bus fares’ and food.
  • The alarming negative net income for this group may not be a true reflection of what is happening in the low income groups for a number of reasons. Some consumption is provided for free, such as healthcare; education; water and sanitation. Further, some of this expenditure is done on their behalf by wealthier family members. There is likely under reporting of income, especially that sourced from informal economy. Moreover, remittances may not be fully captured, as these are difficult to track. There might also be a high reliance on revolving informal credit.

Middle income groups

  • The middle income groups have the highest spending power, but are also the most squeezed in terms of the overall tax burden.
  • Challenging economic environments affect them the most, given that each groups respective wallets are reflective of substitution effects away from non-essential type goods.
  • Average income (after tax) have not kept up with inflation in some cases.
  • Big expenditure moves come from transport, education and service type payments such as medical aid and insurance (called other contributions).
  • Not all middle income groups have the ability to save, as some groups spend more than they earn.

Affluent income groups

  • Compared to the middle class, the Affluent earners experienced above inflation income (income after tax), growth. However, the highest income group experienced a decline in income, which is not surprising given their high tax burden (post the 2017 tax increases).
  • These groups have high net income (savings capacity), which should allow them to absorb higher taxes, specifically after the taxes affirmed in the 2019 Budget.
  • Big expenditure moves comes travel, health as well as contributions. These groups also have a stronger appetite for ‘non-essential’ items compared to other income groups.

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