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Consumer Trends 23 January 2018

SA Consumer Wallets 2018

*Erratum : Removed the duplicate text

Economic outlook 2018

Economic growth: SBR’s forecast is for GDP growth to improve in 2018, to around 1.5%, from an estimated 0.9% in 2017, driven mostly by accelerating consumer spending growth, in turn underpinned by real wage growth and gradually improving support from employment and credit extension. While there is ultimately potential upside to gross fixed capital formation (GFCF), such a recovery may take time. We expect very weak public sector infrastructure spending growth in the short- to medium term, and the expected private sector GFCF recovery is likely to be uneven (across sectors) and possibly delayed. Despite our expectation that the current account deficit will remain relatively narrow, we do not expect any material contribution from net exports to real economic growth.

Headline inflation: The inflation outlook for 2018 is benign, averaging 4.3%, from an estimated 5.2% in 2017, mainly on a stronger rand, but also assisted by an agricultural outlook supportive of moderate food inflation. We forecast a helpful retreat in oil prices, although the recent increase may point to some upside risk to our estimates. The rand exchange rate is the key inflation risk.

Food inflation: We expect food inflation to average around 3.9% in 2018, from an estimated 7.4% in 2017. Apart from the ongoing drought in the Western Cape, we expect agricultural production to continue to improve in response to the end of the SA drought in 2017. This, combined with rand strength and subdued global grain prices, should contain domestic grain prices. We also expect that red meat inflation will start to moderate on a gradual increase in supply (although supply is still well below the historical average). Despite earlier concerns about the potential impact of avian flu on poultry stocks, the impact disproportionately affected on egg layers rather than broilers, with around 91% of the birds that died or were culled being egg layers (and only a very small proportion of broilers affected). It therefore had a bigger impact on egg than poultry prices.

Electricity prices: Nersa has approved a 5.2% electricity tariff increase for Eskom in 2018, and we expect a similar increase to be awarded to municipalities. The 5.2% approved tariff for 2018 is marginally above the 2.2% approved for 2017, underpinning a modestly higher contribution from electricity to inflation from mid-2018. This we expect to disproportionately affect the low to middle income groups (Groups 1-4, i.e. R<36,500 pm household income) - household utilities account for between 7.2% and 7.9% of expenditure for these groups.

Petrol prices: We expect petrol prices to average 9% higher than 2017. Our petrol price assumptions include a sizeable increase in the fuel levy. We expect at least R7bn extra revenues from higher fuel levies (or by removing the zero VAT-rating of fuel and partly counteracting it by lowering the fuel levy). Fuel constitutes about 4% (between R492 and R1,562 pm) of expenditure for middle income households in SA (those earning R12,000-R48,000 pm). Meanwhile, our consumer wallet estimates show that low income (R<="" p="">

Interest rates: Our base case view is that the SARB will be reluctant to adjust interest rates ahead of the Budget and the Moody’s credit rating decision, as there are substantial risks that could be rand-negative. Whether the SARB cut interest rates thereafter would depend on whether the bank’s medium-term inflation forecasts were lowered sufficiently to lift forward-looking real rates above 1.5% at least. We expect two 25bps rate cuts in 2018.

Consumer sentiment: The MMI/BMR Consumer Financial Vulnerability Index (CFVI) in Q3:17* showed a dramatic deterioration in consumer sentiment about personal finance. Similarly, the BER/FNB consumer confidence deteriorated to -9 index points in Q2*, from -5 index points in Q1, reflecting that consumers were more pessimistic about the SA economy. We expect that the appointment of Cyril Ramaphosa as ANC leader to improve sentiment, underpinned by the expectation that there will be renewed private-public sector efforts to boost economic growth and employment. (*Latest data point available at the time of publication.)

SA residential property market

House prices: Q4 saw a renewed uptick in property prices across many segments and geographies. SBR’s National HPI growth averaged 5.4% y/y in Q4:17, or 0.8% above the estimated 4.6% y/y in Q4. This would take average house price growth for 2017 to 4.7%, or just 0.5% above inflation. The modest improvement in house prices in 2017 was encouraging subdued economic growth, pressure on consumers’ disposable income and low levels of consumer and business confidence. In turn, credit conditions remained relatively tight throughout the year, with mortgage advances averaging an estimated 3.1%, or -1.2% in real terms, with the most recent months showing a steadily rising trend. We expect the credit cycle to swing up gradually in 2018, injecting some liquidity into the market.

Vacant land values in the metros: Land values (estimated using Standard Bank’s rich applications data), show vast disparities across regions. Residential land values reflect various key factors with regard to new housing, such as location, the demand and supply of suitable and serviced land for development, quality and accessibility of transport and other physical infrastructure and the proximity to places of work, schools, shopping centres, medical facilities and other amenities. These factors have over time caused substantial upward pressure on land prices for new residential green-field and/or brown-field developments in the major metropolitan areas of the country.

Land in the City of Cape Town, unsurprisingly, was the most expensive in Q4:17, at R1,286,614 per 500 square metres, followed by Cape Winelands at R768,986 per 500 square metres. Although still relatively high, land values in both these regions have been moderating from their peaks in H2:16, with Cape Winelands recording a decline (-8.1% y/y in Q4:17). In contrast, land in eThekwini has been experiencing massive growth, averaging 34.5% y/y in Q4:17, reaching R764,824 per 500 square metres.

We expect house prices keep the upward momentum in 2018 and finish the year moderately higher than general inflation. Purchasing activity will likely benefit modestly from an upswing in consumer and business confidence, underpinned by the expectation that there will be renewed private-public sector efforts to boost economic growth and employment following the ANC elective conference, coupled with our expectation of modestly stronger credit extension in 2018 and lower interest rates. In turn, this will boost property prices. Developments around “land expropriation without compensation” policy and possible land tax will be key factors for vacant land values. However, detail around these policies is still sparse and we do not expect the land debate to be settled anytime soon, at least not before the 2019 elections.

SA car market

The 2017 new vehicle sales rebounded, albeit modestly at 1.8% y/y in volume terms, and for the first time in four years recorded an improvement. During 2017 demand for new cars from rental car companies played a significant role in overall demand for passenger cars with rental car companies purchasing 66145 new cars during the course of the year, 18% of all new cars sold in 2017. Sales through new car dealers, which is probably the best indicator of the true state of new passenger car demand, were relatively weak in 2017, with volumes improving by a meagre 0.2% from 2016 levels. This, however, should be viewed in light of subdued economic growth, pressure on consumers’ disposable income and low levels of consumer and business confidence.

Global and domestic economic outlook for 2018 is on balance more positive than negative for new car sales. Global economy is expected to remain robust (IMF forecasts growth of 3.9%), which should offer support for vehicle exports. In 2017, exports declined by an average 4.6%. Domestic vehicle sales also benefited from moderating new vehicle inflation, which are expected to have averaged approximately 5% in 2017, versus 9% in 2016. Our rand forecasts are constructive, supported by benign global economic expectations, including reasonably strong economic growth and the expectation that capital flows into emerging markets will remain robust. This should help keep domestic vehicle prices in check in 2018.


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