One sector keeping South Africa’s economy alive

This indicates that disposable income is rising in the country due to lower inflation, reduced interest rates, and two-pot withdrawals. 

While this growth is promising and has kept the economy barely ticking over, it is not enough to generate a meaningful increase in economic activity that can translate into reduced unemployment. 

For that to occur, South Africa needs a significant increase in fixed investment to drive productive sectors of the economy, such as mining and manufacturing. 

Furthermore, the growth in consumer spending is relatively narrow, confined largely to clothing and footwear which South Africa manufactures very little of. 

This is feedback from Stanlib chief economist Kevin Lings, who explained why consumer spending has grown strongly in recent years and why it is not enough to meaningfully grow the economy. 

“We still have 1% growth in South Africa. It is not as if we do not have any growth. It is not exciting, but we have some growth,” Lings said. 

“This growth is mainly driven by shopping, essentially. The production side of the economy is still substandard and languishing, but retail sales are growing well.” 

In effect, South Africa’s economy has become highly reliant on shopping for growth and banking to finance that shopping and facilitate transactions. 

While retail sales have nearly doubled in the past twenty years, mining and manufacturing output have declined in South Africa.

Some of this decline is driven by a reduction in South Africa’s mineral stock, as much of it has been mined out, particularly in relation to gold. 

Manufacturing’s decline is a story of the rise of Chinese imports and the headwinds the local industry has faced, from load-shedding to water outages to rising costs. 

The graph below, courtesy of Lings, shows the divergence between retail sales and the productive sectors of the South African economy. 

Shopping is not enough

The strong growth in retail sales in South Africa is not enough to boost the economy, with it being driven by short-term factors. 

Retail sales growth has also largely been driven by clothing and not much else, meaning it is very narrow and sensitive to external shocks. 

“We have become super reliant on shopping, and we have to finance that, so there is a little bit of banking. That is not good enough,” Lings said. 

“It is not good enough because it is import-intensive. When we go shopping, we often buy goods from China and other parts of Asia. We do not benefit from that shopping. China loves our shopping.” 

As a result, the uptick in retail sales does not fully translate into economic growth, as much of the proceeds end up outside of South Africa. 

Furthermore, this growth is driven by short-term cyclical factors such as lower inflation and interest rates. These factors are very likely to reverse at some point and constrain consumer spending. 

“People shop more because they simply have more money. As disposable income grows, so does consumer spending and economic growth,” Lings explained. 

In South Africa, this has been driven by lower inflation and reduced interest rates, which means that wages are growing in real terms and less disposable income is being spent on servicing debt. 

These factors are likely to reverse at some point as beneficial base effects roll out of the equation with regard to inflation. 

The other major factor driving increased consumer spending is access to retirement savings under the new two-pot system. 

This enables South Africans to effectively tap their long-term savings for short-term spending, with the intention that this will be to cover emergencies. 

“People have taken their long-term savings and they go shopping. Throw in an interest rate cut and low inflation, and you have a stronger consumer,” Lings said. 

The long-term impact of two-pot system is unknown, with some saying it will benefit savers and the economy in the long run, with others saying it erodes South Africa’s already small national savings pool. 

Issued on Daily Investor by Shaun Jacobs | https://dailyinvestor.com/retail/100731/one-sector-keeping-south-africas-economy-alive/