SA consumers facing myriad challenges, economy not fully recovered

South Africa’s economy has not fully recovered to pre-pandemic levels and is only expected to recover to these levels towards the end of next year.

Consumers have to deal with higher inflation and a petrol price above R20/litre. After a sharp rebound in economic activity from very depressed levels, growth is expected to moderate in 2022 as the global economic backdrop, monetary policy and income transfer programmes become less supportive, says Bernard Drotschie, chief investment officer at Melville Douglas.

Last year was surprisingly good for local investors, mostly thanks to the strong recovery in the resources sector on the back of high commodity prices, while the rand lost some ground against a stronger US dollar as South Africa’s terms of trade weakened during the year, he says. 

“The South African economy has unfortunately not fully recovered from the pandemic as many other countries have due to the weak state of the economy going into the crisis and a lack of sufficient fiscal support given the indebtedness of the country.”

He says load shedding, social unrest during the third quarter of last year, weak confidence and government’s inability to implement large-scale reforms also contributed to slow growth last year, although low interest rates provided some support for households and consumer spending.

“Omicron clearly had an impact on consumer confidence levels across the world and the non-tradeable services sector of tourism and leisure was once again hit hard as many foreign tourists cancelled their travel plans during the busiest time of the year.

“In addition, the slowdown in China is influencing export volumes, while global supply chains are still not functioning at levels anywhere close to historic trends, affecting industrial production and the ability of SA companies to source enough product to meet demand from consumers.”

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Dire state of unemployment impacts economy

However, Drotschie finds the dire state of the employment market, with unemployment reaching unpalatable levels, even more concerning as well as the fact that the country’s gross domestic product (GDP) growth is expected to return to trend, which is currently approximately 2%, which is nowhere near the level needed to make a dent in the worsening unemployment situation.

Although these trends pose a real threat to the country’s long term socio-economic stability, Drotschie says total household income (in nominal terms) paints a slightly rosier picture as it has made a full recovery since the onset of the pandemic.

“The improvement in total compensation is confirmed by data from the SA Revenue Service, which indicated that employee tax receipts for the first 11 months of 2021 were 5% ahead of the run rate achieved during 2019.

“However, in real terms (adjusting for inflation), income levels are still lagging and will pose an obstacle to the current momentum in consumer spending should the services sector not rebound as widely expected.

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The impact of monetary policy and inflation on consumers

Drotschie also warns that monetary policy on its own cannot drive higher sustainable growth in the economy. He says for that to happen, business and consumer confidence must recover and government must successfully implement its growth reform plans, while improved service delivery will also help with structural problems.

Inflation in SA is still very much under control and within the Reserve Bank’s target range, even if it is above the midpoint, Drotschie says. He points out that it is below that of the US for the first time, partly due to the weak economy, a favourable trade balance and low inflation in the services sector.

He expects the impact of increasing food and fuel prices on consumers to moderate in the coming year, while interest rates will gradually increase to a more normalised level determined by the path of economic recovery, the pace of interest rates adjustments globally as well as the outlook for inflation.

Drotschie also expects that monetary policy will gradually tighten and fiscal support will fade as the country’s balance sheet and debt ratios remain stretched while ever increasing debt-service costs will prevent government from providing much additional support to the economy.

“The good news for investors is that little of the potential uplift in the country’s long-term growth trajectory has been discounted in asset valuations domestically, which is different to what we are seeing in certain offshore markets such as the US. However, attractive valuations on their own will not be enough to sustain the strong returns experienced more recently. In the end, profitable growth is what matters,” Drotschie says.