As I was racking my brain how to explain the very weird year of 2018, an email arrived from 21st Century, a company that operates primarily as remuneration consultants. Chris Blair and Bryden Morton have managed to make sense of all the contradictions, hopes and disappointments, through the eyes of the consumer…
Looking Back on 2018 through the Eyes of the Consumer
Blair and Morton say that as we get ready for the year ahead it is important to reflect on the year that was - were we as South Africans better or worse off in 2018. They concede that this can be a monumental task given the wealth of data that is available in the economy. Thus, their analysis is conducted from the point of view of the South African individual and focuses on the most significant factors that impact the average consumer’s life; namely, economic growth, cost of living and employment.
- Economic Growth
2018 began with the wave of “Ramaphoria” reaching its peak and optimism surrounded the South African economy. As the year progressed, this wave slowly died down as the realisation that the economy had contracted by 2.6% in the first quarter of 2018. A large number of the seeds that led to the contraction had already been sewn before president Ramaphosa was sworn in. Unfortunately these seeds were still present when the economy entered a recession and it was announced that the economy contracted by 0.7% in the second quarter of 2018. During a recession, a number of factors impact negatively on consumers. Typically, the value of the local currency is placed under pressure as investors with liquid portfolios seek out more profitable/safe investments. This often results in a depreciation of the currency until a more positive outlook is attained. Depreciation of the currency results in the price of imported goods becoming more expensive and can impact on the cost of living depending on how large an individual’s exposure to imports is. Unemployment is another issue that comes to the fore during a recession. Fortunately, South Africa has exited the recession and recorded 2.2% growth in the third quarter of 2018.
- Cost of Living
This economic factor is arguably the factor that most affects the consumer as it directly affects the basket of goods that a person can consume. The average inflation rate in 2018 (year to date) is 4.6%, well within the South African Reserve Bank’s (SARB) inflation target. However, there has been an increase in inflation since the first quarter of the year with the current rate at 5.1%. The inflation outlook, together with the need to attract additional investment into the economy has recently prompted the SARB to increase the Repo rate by 25 basis points to 6.75%. This rate is forecast to increase to 7.5% by 2020, which places an additional burden on credit active South Africans that have credit which is linked to the repo rate. Most South African consumers are exposed to credit and so will be affected negatively. According to the 21st Century Increase report (https://www.21century.co.za/increases-snap-survey/), the median salary increase given to employees in 2018 was between 6% and 7%. This means that in real terms, 2018 was a good year for those that have a job (if they received a similar increase to the median increase) since the inflation rate is only around 5%.
Employment has historically been a challenge for the South African economy and is arguably the largest social ill facing the country. In comparison to the third quarter of 2017, the current unemployment rate has reduced from 27.7% to 27.5%. Although the change is only marginal, it represents a step in the right direction. Reducing unemployment has a multitude of benefits to the economy such as increasing the tax base, reducing the need for social grants and providing more consumers with increased purchasing power - which further stimulates the economy. If South Africa is to overcome the challenge of its persistently high unemployment rate, large scale, long term investment is required to provide employment opportunities that are sustainable in the long run.
The three factors discussed above paint a picture of an economy that has struggled over the course of 2018 but performed reasonably well given the difficult economic conditions. Unemployment and the cost of living have been kept in check to a large extent and can even have been said to have performed well given the recessionary period that South Africa faced.
In 2019, the inflation rate is expected to move closer to the SARB’s upper limit of its inflation target and average at 5.5%. Economic growth is expected to return to the economy, although at subdued levels and is expected to grow at 1.9% in real terms. These two statistics represent good news for the economy’s recovery, although significantly larger growth is required to provide opportunities for the 27.5% of the population of working age that are unable to find employment. The efforts of president Ramaphosa and his investment task team (R110 Billion investment) will play a pivotal role in creating sustained, long term economic growth at levels that are sufficient to erode unemployment and increase the number of employment opportunities available.
Blair and Morton end on an optimistic note - Hopefully, 2019 will be the “year of hope” that we all hoped 2018 would be when we were in the midst of “Ramaphoria”.