Consumers are beginning to be increasingly conservative – deliberately so. This is according to household and property sector strategist, John Loos at FNB, who said the household sector income, debt and consumption expenditure numbers confirmed this.
“When we use the term ‘deliberately more conservative’, we refer to a household sector that may be starting to intentionally curb its spending and borrowing habits as opposed to a situation where slower income growth merely forces this behavioural change upon households,” said Loos. “Two observations in the residential property market led to the initial assertion that households as a group may gradually be becoming more cautious, or conservative.
“Firstly, we have seen a gradual decline in the percentage of home sellers selling in order to upgrade to a better property. This is by and large the non-essential side of property trading, which in tougher times can normally be put on hold. Secondly, we have seen some shift in demand towards the lower end of the residential market, with the higher priced luxury home segment having seen its activity levels slow first of the major segments.”
Drivers of weak consumer confidence
Loos said the bank had noticed consumers’ expectations for the economy over the next 12 months being more negative than their experience of their own financial position at the time.
“In other words, it is the broader environment, and the future, that concerns them more,” he said. “There were numerous reasons for this, much related to the global economic slowdown and commodity price slump, but also to local factors including interest rate hiking, and heightened political and future policy uncertainty.
“So what we had really expected to ultimately see was a more noticeable divergence between real household consumption expenditure growth and real household disposable income growth, and it appears that we are starting to see more signs of such a divergence. This in turn would translate into a long overdue improvement in the household sector savings rate as well as perhaps to slower household sector borrowing growth.”
Loos said real household sector disposable income growth has slowed from 2.5% year-on-year in Q1 2015 to 1.5% year-on-year as at Q1 2016.
“However, real consumption expenditure growth has slowed even faster of late, recording a mere 0.8% year-on-year as at Q1 2016, with the quarter-on-quarter annualised growth rate turning negative to the tune of -1.3%,” he said. “The result is a further decline in household consumption expenditure when expressed as a percentage of household sector disposable income, to 100.8% of disposable income. This reflects some positive progress in returning household consumption to more sustainable levels relative to disposable income levels, from a 102.3% high around 2013.”
Loos said that in the longer term a significantly higher savings rate could become a “growth positive”, contributing much needed domestic funding for fixed investment.
“Ironically, perhaps, tougher economic and financial times are more likely to bring about a higher savings rate than the good times, despite it being theoretically tougher to save during the tougher times,” he said.