Backsliding into Recession: what South African Consumers can do to cope better

Few would dispute the view that the South African consumer has been under immense pressure in recent years. Prolonged periods of rising living costs and turbulent labour market conditions, together with ongoing government inefficiency, are just some of the factors that have significantly dented consumer confidence, further plaguing an already-fragile domestic economy.

When we look beyond our borders to the bigger picture, we see a global economy still struggling to find equilibrium in a post-subprime crisis world. While there are signs of recovery (the IMF expects the world economy to grow by 3.5% this year), economic growth will be realised by many, but not all economies. Global policy uncertainty, combined with the backdrop of sluggish manufacturing output means that export-led, commodity-rich economies may not immediately share in the spoils of the global recovery.

With few non-domestic drivers of growth, an export-led economy like ours finds itself in a challenging global environment. Moreover, domestic factors, such as low productivity levels – exacerbated by restrictive labour regulations and a significant skills shortage in many industries – together with the inefficient deployment of public resources, are further contributing to the low growth state.

Implications of South Africa’s technical recession

Q1 2017 saw the announcement that South Africa was in a technical recession for the first time in eight years, as the economy shrunk by 0.7%. This announcement was met largely with lack of surprise, given the recessionary conditions that the South African economy has experienced over the past few years. Unfortunately, near term prospects remain dim, with growth for the year 2017 expected to average just 0.5%.

Recessions have certainly not been an unusual occurrence in recent times, and our emerging market peers – namely Russia and Brazil – have both found themselves in negative growth territory. Nigeria, Africa’s largest economy, was also in recession for five consecutive quarters on the back of weak oil prices. What is evident is that periods of economic downturn have been severely detrimental for both businesses and consumers alike; weaker access to credit, increasing borrowing costs and higher levels of inflation are just some of the constraints that characterise these periods.

It is worth noting, however, that no two downturns are exactly alike, either in duration or severity. For the South African economy, the severity of the 2009 recession was highlighted by a 6.4% contraction in Q1 GDP output, almost double the expectations of industry experts. During this period, oil prices were at all-time highs and the resultant upside stickiness in price inflation placed immense pressure on the South African Reserve Bank’s monetary policy committee (MPC). For much of the period between 2007 and 2009, inflation was far higher than the Reserve Bank’s 3-6% target band, peaking as high as 11.3% in September 2008. The MPC responded by sharply raising lending rates, making it an extremely challenging environment.

Some hope left for the over indebted consumer

This time around, we are in a less hostile (albeit still constrained) environment. Inflation has drifted back to within the Reserve Bank’s target range, allowing for a more dovish approach, as evidenced by a recent MPC announcement to reduce lending rates for the first time in five years, dropping prime to 10.25%. With forecasts suggesting that further declines in lending rates may be on the cards over the next 12-18 months, there may yet be a glimmer of hope on the horizon for the over indebted South African consumer.

It must however be noted, while the less hostile environment has provided more flexibility for monetary policy makers to ease pressure on consumers and stimulate growth, there are key components of our domestic economic landscape that have deteriorated since 2009, and this has generated conditions that work against that much-needed flexibility.

Impact of unemployment and junk status on SA economy

Unemployment, for example, was at 23% during 2009, significantly lower than the latest available figure of 27.7%. Furthermore, in 2009, South Africa held a mid-investment grade rating despite the difficult environment, compared with the non-investment or “junk” status currently assigned by two out of the three top-tier international rating agencies. Interestingly, that period was not without its own political turmoil, with former president Thabo Mbeki being ousted in September of 2008. At the time, however, the global market perception was that South Africa had retained a high degree of fiscal discipline, as well as an ability to shield policymaking institutions from political influence. This is not the case currently and this political uncertainty, and its impact on the wellness of the economy, plays a bigger role in the world today than it did eight years ago. Further volatility in the political landscape, which is likely to last until after the 2019 elections, may further aggravate this situation.

What you can do

From a consumer perspective, while it is always advisable to adhere to responsible financial management practices, the importance of this discipline is highlighted in periods of economic uncertainty. Paying down on existing lines of credit, thinking twice before accessing credit to fund discretionary expenditure, or starting up or adding to a “rainy day” fund are just some of the simple ways consumers can better position themselves to cope with any further potential impact of the uncertain economic environment.

While current indications suggest this may not be our worst recession, it certainly won’t be our last, and while we cannot completely shield ourselves from the situation, we can take certainly take steps to soften the impact on ourselves and our loved ones by exercising sound financial discipline.