In recent dealings with clients, the usual unease was expressed about what could possibly be keeping the consumer afloat in these trying times?
Herewith some speculation.
Some of the tenacity of our household consumers in times of great adversity may be explained by inertia, also known as semi-indexing, where our institutional arrangements provide continuity which is counter-intuitive to generally observed conditions.
Put differently, the bulk of the formal labour force gets a monthly wage or salary, legally payable until this labour contract ends. Strong employers such as the government (massive taxation & borrowing powers) or successful businesses have the means to keep paying salaries even in tough times. Even large parts of the informal sector (domestic workers, gardeners) may similarly enjoy stable work for as long as their work arrangements last. And 17 million welfare recipients can rest assured their monthly cheque is in the post (even if private suppliers to government cannot always assume this).
With labour scarcities, market power and tradition suggesting inflation plus labour pricing in many of our sectors, and this then often extended from the strong to even the weakest producers, the household may enjoy a certain real income gain over time.
In recent years, with SA inflation hugging the 5%-6% reality, the average wage increases according Andrew Levy wage settlement surveys tended to be 8% (in practice covering a 6%-10% range capturing the great majority of workers). Exceptions got even more or less in a given year.
Higher growth would translate into more job growth, and also more overtime, bonuses & flexible income (fees or commissions transaction-linked, but also dividends paid & rentals received).
In times of weaker growth, all these other elements suffered. In times of 1% growth, the 8% wage model survives (inflation plus 2%-3%) but job losses & variable income losses on the margin now erode the total household real income.
Also, there have been restrictive changes in access to credit, mortgage as well as unsecured debt, providing less support to household disposable spending than in earlier periods.
Real consumption growth also dwindles, to say 1%, but doesn’t collapse into negative territory as in a recession (just as yet). For inertia rules. The economy hasn’t been shocked enough for producers (& households) to defensively pull in their spending, causing real income & output loss. Institutional arrangements keep supporting the main money flow to households, even as employers keep adjusting their costs on the margin of existence.
And so we keep afloat, still moving forward, even when headwinds have deeply undermined confidence, and where one would have expected a much bigger fall in income to have already resulted in a much bigger decline in output, feeding on each other in a race for the bottom. We tend to hang together, but assuredly when separated. Our contractual obligations & seeking for continuity (labour peace) keep us together and provide inertia when things otherwise seemingly fall apart. At least, that is, up to a point.
Cees Bruggemans, Consulting Economist
Avior Capital Markets (Pty) Ltd
Tel: +27 11 589 2876 | Mob: +27 82 803 9394
E-Mail: cees@avior.co.za | Web: www.avior.co.za | Twitter: @AviorCapital