Apprehension at consumer spending
WHILE conversation appears to focus on the domestic residential property market and the possibility of a "bubble" situation developing, less attention is being given to the financial situation of South African households.
Their financial position is key to determining the sustainability of the current house price levels and, while showing some signs of experiencing increasing pressure, on average the household situation appears strong.
The recent FNB/BER Consumer Confidence Index shows consumer confidence having reached a historic high during the second quarter of this year. With interest rates being such an important factor in the sentiment of the consumer, it is not surprising to see such statistics from the first half of the year, with prime overdraft rates at levels last seen in the early- 1980s.
However, there are certain other factors that have also contributed to this positive sentiment, and the countrys labour market inflexibility is probably one such factor. Broadly speaking, labour tries to keep up with historic inflation figures, while other more competitive markets do not allow business the same opportunity.
Thus, following the inflationary surge of 2002, when average remuneration per worker rose at an average rate of 9,5%, very much in line with CPI inflation of 9,2%, the average rate of increase declined only marginally, still recording an 8,3% increase in average remuneration per worker in the final quarter of 2003. This was totally out of line with CPI inflation of 0,75% y/y for that quarter.
The mismatch between remuneration growth in 2003 and inflation, accompanied by rising economic growth from mid-2003 onward, caused relatively strong growth in real household disposable income.
Then there is also the possibility of some "wealth effects" emanating from a booming housing market. When this asset class booms, it positively affects the wealth of a far wider group of citizens than would be the case in an equity boom, and the feeling of increased wealth can cause households to become more comfortable with greater levels of borrowing.
The combination of low interest rates, low domestic consumer inflation, relatively strong and rising real disposable income growth, and a booming housing market, have therefore contrived to send consumer confidence soaring.
The solid state of consumers financial situation, and cause for strong confidence, is further reflected in the figures of civil judgements for private individuals, which showed a y/y decline of 8,7% for the first four months of 2004, compared with an average increase of 10,6% for the year 2003.
The first consumption component to react to last years interest rate cuts was new vehicle sales, which is strongly credit-driven and thus reacts speedily to interest rate changes. New vehicle sales rose by 22,3% y/y in the second quarter of the year, up from 17% growth for the first quarter. The average house price increase, measured on a y/y basis, also performed stronger in the second quarter (25,1%), compared with the first quarter (23,3%). We estimate, too, that real household consumption expenditure growth rose from 3,9% y/y in the first quarter to 4,2% in the second.
Such growth figures may cause some people to believe that there is a household demand boom that may not only lead to a property bubble situation, but also to an unsustainable situation in terms of consumer spending. Certainly the figures are impressive.
Publisher/Uitgewer: Absa Card / Absa Kaart