Brace yourself: tough times ahead

Johannesburg – Consumers are coming under increasing pressure as take-home pay starts to slow and food and fuel prices pressure inflation.

This comes as more and more people are indebt, and growth in take-home salaries is slowing.

The latest BankservAfrica Disposable Salaries Index (BDSI) shows that the growth in disposable salaries continues to slow, and it is likely that this trend could continue.

In March, the increase in disposable salaries was 6.5 percent year-on-year, just ahead of inflation, which came in at 6.3 percent, notes Dr Caroline Belrose, head of Knowledge and Risk Services at BankservAfrica.

“The slowing trend in the total payments for salaries and pensions is probably the best indicator that the current growth in retail sales is coming from the falling sales of big ticket items such as cars. There is likely to be a bit of extra consumer credit growth driving retail sales too,” says Mike Schüssler, chief economist at Economists dotcoza.

Just this week, Mall of Africa, billed as Africa’s largest mall, opened to much fanfare, but analysts questioned whether SA’s retail space was not overburdened, given the pressure consumers are under to cut spending, especially as fuel is likely to rise again next week, and prime interest rates are now at 10.25 percent.

“Within the next few months we believe that retail sales will no longer be growing at a real rate of 4 percent or even 3 percent. Interest rate hikes and slower salary increases based on last year’s low inflation numbers will limit the employee’s ability to spend. This is bad news for large item sales like cars and furniture. It is likely that retailers will struggle for real growth in the next few months,” concludes Schüssler.

Pending food and fuel hikes in the pipeline are not going to be offset by increased take home-pay.

BankservAfrica says the slowdown in disposable salary growth is also impacted by personal income taxes that were effectively raised again by not compensating for inflation. This is called bracket creep, and means that as people’s salaries or pensions go up to compensate for inflation, they enter a higher tax bracket, therefore in real terms they are taking home the same amount.

Price hikes

And, as consumers take home less money, many are in debt and now face a higher cost of living.

Economist Dawie Roodt says the price of red meat is set to rocket by between 50 percent and 60 percent, an increase that will have a devastating impact on consumers.

“The prolonged drought is the major factor but there are also other factors at play such as the massive increase in the price of maize which is the staple food for fattening beef before going to market.”

Neil Roets, CEO of debt management firm Debt Rescue, says, in addition to the increase in the price of red meat, consumers should also prepare themselves for an 18 cents a litre in the price of petrol which in turn will have a knock-on effect on the prices of all other commodities.

“We are on the eve of a perfect storm which is going to affect everybody, but especially the poorest of the poor who spend more than 50 percent on food.”

There is one ray of hope on the horizon. The price of diesel is expected to drop by about 10 cents a litre which will to some extent counteract the increase in the petrol price, says Roets.

Roodt adds it is likely the Reserve Bank would increase the repo rate by as much as 100 points during the course of the year to combat inflation, which could reach 7 percent by the end of the year.

“I would not be surprised if they increase it by 125 basis points because inflation in general and food inflation in particular has become a long shadow hanging over the government.”

Currently, most consumers owe more than 75 percent of their monthly salary cheques to financial institutions, which Roodt says shows just how dire the situation actually is.

DebtBusters head of Marketing, Wendy Monkley, notes there are close to 24 million credit active South Africans, and 10 million of them are in arrears on their accounts or are struggling to pay their monthly debt repayments. This is based on the latest figures from the National Credit Regulator.

“Almost a quarter of our clients in 2015 had payday loans when they came to us for debt counselling. This is an indication of how desperate these people are for cash.”

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