Will the consumption boom continue?

Farmers can only produce goods if consumers buy them. Over the last ­couple of years South Africa ­experienced a consumption boom.
Issue date 1 June 2007

- Advertisement -

Farmers can only produce goods if consumers buy them. Over the last ­couple of years South Africa ­experienced a consumption boom. In spite of some risks it seems as if the boom will ­continue for at least another year. The per capita disposable income of households has increased in real terms from R12 722 in 1994 to R16 246 in 2006 – an increase of 2% per year. This means that every consumer spent 2% more each year. Consumer expenditure thus increased at a rapid rate. There is a strong relationship between consumer income and consumer expenditure ­(Figure 1). The economists who take part in the Economist of the Year ­competition expect that consumer ­expenditure will increase by more than 5% in 2007.
The sharp increase in fuel prices may have a negative effect on the money consumers have available to spend on food. However, it seems as if consumer spending on durable and semi-durable goods is slowing down slightly. A weaker rand has resulted in higher prices for imported goods and it seems as if the consumer’s appetite for credit has slowed down slightly. Recently published figures show that consumers’ credit uptake in March grew by 23,8% year-on-year, down from the previous months at 25,3%.

Credit cards increase debt

Consumer debt increased from a low of 51% of disposable income in 2002 and peaked at 71,8% of disposable income in 2006. The relatively low interest rates has minimised the negative effect of consumer debt. A worrying aspect of the current consumer credit profile is the large amount owed on all types of new credit cards. At the end of 2006 there was a rush by financial institutions and retailers to give out credit cards to all. Even Reserve Bank governor Tito Mboweni was stopped at the airport and offered another credit card – he was definitely not pleased with that.
If interest rates increase further, the level of consumer credit will impact negatively on the consumer’s disposable income and on consumer expenditure. Higher ­interest rates usually result in less expenditure on luxury and semi-luxury goods and also in higher expenditure on basics such as food. Consumers who cannot afford the monthly instalment on the large flat screen TV will still spend their whole ­salary, but on food and other basics.

Middle and low income groups

To a large extent the increase in per capita disposable income is the result of a sharp increase in the disposable income of the new emerging middle class. This group will be hit hard by an increase in ­interest rates. However, they are an ­important part of the market for agricultural ­products.
The lower and lowest income groups spend a large percentage of their total income on food. Social grants make out a large part of this group’s total income. Social grants grew at a fast rate since 1994. As 2008 is an ­election year, chances are that social grants will be increased sharply in 2008. In many smaller towns pension day is the only boom day in a month. The low income group will remain large buyers of farm produce.

- Advertisement -

Increases in food prices

According to the recent Food Price ­Monitoring Committee report, retail food prices increased on average by 7,9% from December 2005 to December 2006. On a PPI (manufacturing) level, food prices increased by 11,5% and on an agricultural level by 13,3%. We can thus expect further sharp increases in food prices on retail level.
On balance it seems as if we can expect the current retail boom to continue at least for another year. The only serious downside risk is the possibility of a sharp increase in interest rates, resulting in a sharp decrease in consumers’ spending.
Higher food prices and the always present risk of higher oil prices may force the Reserve Bank to increase interest rates. The higher product prices ­alleviate ­pressure on farmers struggling with sharply increased production costs. Higher prices may not last indefinitely and farmers must ensure that higher product prices are not translated into higher production costs. Strict cost ­control is crucial for success.
Dr Koos Coetzee is an agricultural economist at the Milk Producers’ Organisation.
All opinions expressed are his own. |fw