REEZWANA SUMAD, SHAUN CHAUKE AND PAUL STEEGERS: Consumer spending revival expected in next two years

After a turbulent period for SA consumers, the macroeconomic environment is starting to look promising after the formation of the government of national unity (GNU) cabinet. Prospects of higher growth, lower inflation and interest rate cuts are likely to boost consumer consumption over the medium term.

Though household finances are still not in great shape, as debt and debt servicing costs have risen and disposable incomes have contracted, negatively affecting consumer spending, gains in household net wealth have been driven by those with access to property, interest and other income.

For the first time since the Covid-19 pandemic we see encouraging signs of the green shoots of a recovery in consumer spending over the next 12-24 months, boosted by the expectation of lower interest rates, a stronger currency, lower inflation and steady economic recovery.

Furthermore, the reform of the pension system, which suggests after-tax consumption as high as R37bn for people earning below R350,000 a year; legislative changes to the education sector, which could add another 500,000 children to the early-childhood development institutions at a cost of R17bn a year, including upfront infrastructure cost of R12bn; and the extension of the basic income grant, costing R36bn a year, could provide a near-term boost to consumption in SA.

While most consumer-related indicators are still profoundly negative, inflation fell to a year-to-date low in May, with food inflation at a four-year low, while household inflation rates in most low- and medium-income households have also eased. This has supported consumption spending on durable and nondurable goods during the past two quarters, at the expense of services, as services inflation picked up rapidly at the start of the year.

Though real disposable incomes remain constrained, nominal disposable incomes have gradually increased and consumers are upbeat about their household finances, particularly over the next 12 months.

This is a welcome development after the cumulative interest rate hikes of 475 basis points (bps) since November 2021, when household debt dynamics deteriorated. Debt-to-disposable-income ratios rose to their highest level since the third quarter of 2021, making consumers cautious about taking on more debt, as household credit extension growth remains low.

However, the consumer confidence index turned a corner in 2023, which suggests a recovery in credit extension to households and corporations is likely. The index tends to be a leading indicator of turning points in private credit growth by about four quarters. It is currently deeply negative but recently improved by two index points to -15 points in the first quarter of 2024, from a recent low of -25 points in the second quarter of 2023.

This suggests a bottoming of private credit growth in the second quarter of 2024, and a potential rise in credit demand towards year end and into 2025. GDP growth is expected to recover to 1.6% in 2026 from the 1.2% expected in 2024, and this recovery will create jobs in the local economy, improving consumer spending.

We also expect the impact and base effects of the Covid-19 pandemic to have worked themselves out of the system by 2025. Already the number of people employed in SA is well above prepandemic levels, though higher growth levels are needed for a further recovery in the labour market. Our estimates are that for every 1% increase in employment, real consumption expenditure should rise by 0.6% (or R19bn a year).

With tourism, for every 1-million increase in the number of tourist arrivals, actual spending (at restaurants, hotels, recreation, trade, catering and accommodation) rises by R8.5bn, or 0.1% of GDP. These figures are small because the bulk of tourism spending in SA originates from domestic tourists. Nonetheless, 1-million more tourist arrivals into SA would boost growth by 0.2%, but would not be enough to reach the prepandemic level of 15-million holiday tourists (10.8-million arrivals in 2023).

The boost from pension reform through the two-pot pension system, to be implemented in September, shows that additional consumption could temporarily boost GDP growth by 30bps-50bps, spread over several months in 2024 and 2025. We have used tax filer data from the SA Revenue Service to estimate the potential withdrawal risk, the tax windfall and the potential short-term consumption boost. In short, our estimates suggest that if low-income earners access their savings pot during the first year it may boost after-tax consumption by as much as R37bn.

Finally, we expect two cuts of 25bps each to the repo rate, taking it to 7.75% by the end of 2024. Savings from debt repayments are spent into the economy, and this should bode well for the health of SA consumers over the medium term. Alongside this, lower inflation, higher growth and a rise in employment, together with the above-mentioned idiosyncratic factors, should see consumption spending rise over the coming quarters.

With more than three months of no load-shedding and continued investment in private sector renewable projects, our estimates suggest that economic growth is already about 70bps higher than it would have been if no embedded generating capacity were in place.

• The authors are senior equity research analysts at Nedbank Corporate & Investment Banking.