Flat consumption to fiscal fixes: What’s next for SA households?

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SIMON BROWN: I’m chatting with Ricardo Smith. He is chief investment officer at Absa Investments. Ricardo, I appreciate the time today.

If we go back to the beginning of the year, we were quietly optimistic in terms of the South African consumer for the year ahead. Things have changed. But to be clear, even when we had the Q1 GDP data numbers clearly showing that we weren’t out the woods, the number that stood out to me was consumption – largely flat.

And then, of course, in the second quarter we’ve had the war in Iran, we’ve higher fuel prices, higher rates. It’s probably been a tougher year for consumers than last.

RICARDO SMITH: Hundred percent. And the issue with the economic activity is that structurally GDP has not been outpacing population growth. So on a per capita basis we have been getting poorer.

And then if you look at the sectors like mining, manufacturing and construction – and even worse when it comes to construction – they have not been doing well. These are labour- absorbing sectors, and that has translated to structurally high levels of unemployment.

We’re still sitting above pre-Covid levels and confidence is low. Spending is low. So it has been quite a tough environment for consumers.

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SIMON BROWN: It has. And it’s not looking to get better in a hurry. GDP for the full year is maybe a little over 1%. There are talks that we might even get another rate hike from the MPC, and there is limited income growth for the consumer. It’s going to be a tough rest of 2026.

RICARDO SMITH: For sure. There are, however, some positive shoots that are worth noting.

The first is that global oil prices have come down. There is a peace deal between the US and Iran. It is a volatile peace deal because every week there is something that potentially changes. But, by and large, oil prices are behaving. It takes a while for that to filter through to local inflation.

The interest rate environment: we’ve seen one hike this year off the back of these elevated oil prices. We may see flat policy regime from here on and even potentially cuts next year or in the latter part of the year.

And, relatively speaking, we are coming from a couple of rate cuts over the past 18 months. So there’s positives there.

Debt has been a bit more stable. Disposable income has come down over the years, with two-pot withdrawals coming in and a lot of debt repayments, a lot of essential spending, a lot of pressure relief. So there are some green shoots.

And then from a government perspective we are seeing fiscally they are allocating a lot more to economic development than they have in the past.

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We’re seeing that debt containment story coming through in lower inflation targets. And in fact, even now inflation, as elevated as it is at 4.5%, is expected to come down. So there are some green shoots.

But these are structural issues and they do take quite some time to impact the man on the ground.

SIMON BROWN: I like your point around that 4.5% inflation. It’s high for the new target, but if we’d been talking around 4.5% a year ago, it would have been smack in the middle, and we would have all been comfortable with it. It is circumstances.

You mentioned that 0.25% rate increase, and we had a lot of decreases – a year, year-and-a-half of rates coming down a quarter point. I mean, it does hurt. It’s what, about R240 per R1.5 million of bond, so there is some pain there.

The flip side, of course, is that consumers, as savers, if they’ have the ability to save, can potentially get a slightly better rate as well.

RICARDO SMITH: Hundred percent. So there is a better rate. But I do think that the MPC is trying to move away from that environment where the cost of debt is excessively high.

So there is a positive correlation between long-term inflation and long-term interest rates.

They will be a lot more cautious about inflation now, as they try to anchor inflation with their new target of 3%.

But once it is well anchored in the long term we would expect the cost of debt to actually come down quite significantly. There’s quite a lot of long-term positivity that can come through from all the structural reforms and policies that have been put in place. It just takes a while for us to get there.

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SIMON BROWN: And that anchoring is so very, very important. I appreciate it’s a difficult concept often to get our heads wrapped around but, if as consumers we are kind of anchoring around the 3%, then our salary increases are lower and it all just brings that inflation number down and ultimately the cost of the debt down – which actually benefits us at the same time.

RICARDO SMITH: Hundred percent. The real thing that we should be tracking is real purchasing power, and that’s what they’re trying to control. Most of our major trading-partner economies have a significantly lower inflation target, and they’ve been having inflation troubles of their own. Well, with the exception of China, which has been quite low.

If you look at the US, look at Europe, look at the UK, they’ve had very high levels of inflation in the last three to four years, so you know that purchasing power – and we’ve seen that coming through in rand resilience. Most of our inflation is imported through our currency.

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So it is important to maintain those real rate differentials and ensure that we’re not losing value in our rand faster than what is happening, say, to the dollar or the euro or any of our other trading partner economies.

Importantly, we have seen labour – well, analysts were the first to actually revise their expectations of inflation lower – but we have seen some follow through in terms of consumers, in terms of labour and in terms of business.

A bit of a laggard where consumers are, but inflation expectations have come down to 4%, 4.5% there with analysts kind of anchoring around 3% and labour unions around 4%-odd. So we are trending in the right direction.

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SIMON BROWN: We are trending in the right direction. I take your point around global inflation, and the US has been five years outside of their 2% target. We’ve been out of sight of our target for a month and we’re starting to worry.

We’ll leave it there. Ricardo Smith, chief investment officer at Absa Investments, appreciate the time.

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