Consumers Hit the Brakes By Tendani Mantshimuli, consumer economist, Liberty Life Figures show that consumers have cut back on debt and are choosing to rather save their cash. While this is bad news for companies relying on consumer spending, it is a healthy move for over indebted households. Consumer spending has slowed down South African consumers, like those in the rest of the world, are feeling the pinch from the global economic downturn. Data published last week by the Reserve Bank and Stats South Africa gave some insight to how South Africa consumers are faring in the current economic downturn: the South African Reserve Bank (SARB)’s Quarterly Bulletin shows that spending declined further during the first quarter of this year while April retail sales data from Stats South Africa also indicated a decline in spending. During the past few years when the economy was booming, spending increased significantly. Expenditure on durable goods like cars and furniture was largely financed by credit which was relatively easy to get then; banks actually competed to finance spending on these goods as well as on houses. Then two things happened, which partly explain the brakes in spending. The first was the introduction of the National Credit Act, which tightened lending criteria, and the second was the crisis in the global financial system and economy that made even South African banks wary of lending without imposing very strict conditions. As a result the source which financed durable goods expenditure tapered off. In addition, with the economy in this weakened state, companies had to retrench some of their workforce which leaves that much less income in the economy to spend on retail goods. Consumer confidence in the state of the economy and their own financial status was accordingly dented which makes them reluctant to spend. We will continue to see this until consumers’ incomes start improving. People are starting to save more On a more positive note, the SARB data also indicated that household saving edged up in the first quarter of 2009 compared to the last quarter of 2008. The trend towards saving rather than spending is being displayed by consumers not only here in South Africa, but also in some of the major global economies. This is a welcome development because the South African consumer remains highly indebted with household debt as percentage of disposable income remaining quite high at 76.7% in Q1 09. However, the rate at which at which consumers are taking up new debt has declined considerably since last year. Interest rate cuts give an opportunity to save Although the SARB monetary policy committee meeting (MPC) decided this month to hold on further interest rate cuts at their June meeting, homeowners have still benefited from a 450 points point cut in interest rates since December. This constitutes a ‘saving’ of about R2300 on a R700 000 bond. Consumers need to be wise about how they spend this extra income and also be aware that this could be the end of the current easing phase of monetary policy. In the past few years, people took on a lot of debt because interest rates were low and credit was readily available. This was done with little thought about the impact on household budgets when interest rates start increasing again, as they always do. This is a good time to start planning for that inevitability: If possible, it’s a good idea to keep bond payments where they are and not reduce them each time rates come down. That way you reduce the capital outstanding on your bond faster and also pay lower interest. Paying off your debt while interest rates are low puts you in a better position when rates will start increasing again; hopefully your debt will be much smaller or about to be paid off. Consumer confidence about the economy’s prospects, and their own personal finances, is very low at the moment, making consumers wary of borrowing more and also spending on big items like houses, cars and furniture. Part of that has translated into some growth in saving. Although some people may discouraged to save by the low interest paid in the money markets where most people turn to during times of volatility in the stock markets, there are excellent investment opportunities that your financial adviser can help you with.