[Opinion] Falling consumption spells disaster for economy

In 2019, household consumption expenditure as a proportion of Gross Domestic Product (GDP) stood at 60.2% compared to 21.3% of general government expenditure. This means that the South African economy is highly reliant on consumer spending in driving economic activity. When consumer spending plummets, economic growth fizzles out, too.

And consumer spending is falling. One of the reasons is the estimated decline in real GDP growth for 2020. According to the Bureau of Economic Research (BER), real GDP growth is estimated to decline by 9.5% in 2020. 

Employment levels are inextricably linked to economic growth. Should economic growth plummet, we can expect a sharp rise in job losses. Findings from a recent survey by the National Income Dynamics Study (NIDS) highlights the early effects of the nationwide lockdown on unemployment. NIDS estimated that 17 million people were employed in February 2020, but that only 14 million were employed in April (a decline of 3 million or 18%).

Rocketing unemployment

A rapid decline in economic growth followed by rocketing unemployment levels will have a detrimental effect on consumer confidence. According to the Consumer Confidence Index produced by BER, consumer confidence fell off the cliff in June 2020. It shows consumers feel especially reluctant to buy durable goods such as household appliances, personal transport equipment, computers and entertainment goods, and luxuries such as jewellery and watches.

Debt is also dealing a significant blow to consumer confidence and household finances. South Africans are drowning in debt, which is affecting their ability to save.  In fact, these trends were already evident before the pandemic reached our shores and the extended lockdown will only exacerbate household debt levels. 

According to Old Mutual’s Savings and Investment Monitor report released in June, four out of ten consumers are falling behind on their credit-card payments and household bills, while a quarter of consumers are struggling to keep up with their rent and home loan payments. As a result, consumers are resorting to ever more desperate means to keep up with their debt obligations. A third of consumers are planning on dipping into their savings to cover their loans and bills, while a fifth are borrowing from friends or family members. The overall majority are considering taking a payment holiday.

Indebted consumers

South Africans’ increasing inability to service their debt under the lockdown has led to a series of interest rate cuts aimed at providing relief to indebted consumers. Lower interest rates will, however, disincentivise households to save.

Due to a loss of incomes and rising debt levels, South African consumers are reprioritising their budgets and changing their spending behaviour. This is clear from the latest retail trade sales data released by Statistics South Africa (Stats SA). Retail sales in textiles, clothing and footwear declined by 37% between 2019 and 2020, while retail sales in household furniture and appliances dropped by 42% over the same period. 

The latest data from the National Association of Automobile Manufactures (NAAMSA) reveals that new vehicle sales for the first half of 2020 suffered a dramatic decline of 36.9% compared to 2019.

Drag down economic growth

The overall majority of South African consumers have been hammered with job losses, furloughs (temporary layoffs) and reductions in income. Household expenditure will therefore remain constrained and drag down economic growth.

To boost consumer spending, urgent reforms in labour market and empowerment policies should be implemented to remove restrictions on economic activity. These reforms include revising the minimum wage, removing policies such as BEE and making it easier to start a business.

Failing to do so will herald a prolonged period of economic stagnation.

Original article here.