Market Trends & Insight Recessionary conditions prompt consumers to be more value orientated Since October last year when the developed world began to slip into an economic recession, the world has changed. So, as South Africa’s Finance Minister Trevor Manuel attempts to steer the country towards a period of financial consolidation, how does the consumer adapt to a world that is now a different place? One thing is for sure: the latest recessionary conditions are prompting consumers to be more concerned about cash, and employees are worrying about their jobs, prompting them to become more value orientated and demand more value for their money. “With the insecurity that these conditions bring, consumers are looking at ways to reestablish a sense of stability in their lives,” says Johan Botha, Senior Economist at Standard Bank. “Consumers are also being forced to tackle debt as a matter of urgency and get their finances in order. Households will seek out the goods and services that give them exactly what they want and will demand that businesses communicate with them in a transparent and open manner.” In an effort to stretch their money further, Johan says that households will shop around to find the cheapest priced goods and cheapest services such as banking and insurance and many will cut back on unnecessary or frivolous expenses and put money aside in savings or similar accounts, in order to have something to fall back on in the event of an emergency or a drop in income. Johan points out that each individual household will have its own unique problems and that it is important to emphasize that households experiencing severe financial stress should talk to their banks as early as possible. “Banks or financial advisors will provide advice on how households should handle the situations. This could include spreading loans over longer periods and in this way reduce payments. In some instances where multiple debts exist, a debt consolidation loan may be the best option.” While the recent 100 basis points (or 1%) cut in the repo rate was a reflection of the steep deterioration in the local economy, there is worse yet to come. “The cuts in interest rates that we have seen over the last few months are primarily the result of declining inflation expectations,” he explains. “With economic growth showing a sharp decline, the state of the economy will become a major driver of interest rates in the months to come. Fact of the matter is that cuts in interest rates will not have an immediate impact on the economy.” Johan says that there is a lag of 12 or more months before the impact of lower rates will be fully reflected in the growth performance of the economy. A 100 basis points cut is certainly not sufficient to lift the economy out of the quandary we are in. “Consumer and business confidence are quite brittle at this stage and need to normalise before we can expect a meaningful increase in economic growth. We probably need at least a further 300 basis points cuts in 2009. ” With regard to whether the drop in repo rate will help the housing market recover at all, he says that while interest rates are a major driver of house prices, so are disposable income, debt and consumer sentiment and under the current environment finding capital is a tough task. “The deposit required by financial institutions (up to 20% of the loan) makes it very difficult for first time buyers to enter the property market,” Johan adds. “Also remember that the average household is heavily indebted.” However, he adds that in due course, with rates declining and inflation falling, households may have more money in their pockets leading to an improvement in overall household confidence. “This will kick start the housing market and is expected to be visible towards the last quarter of 2009.” With regard to industry, the manufacturing sector has officially plunged into recession and with the onslaught of weak global demand for domestic goods and deteriorating domestic demand in business activity, a recovery in the sector is illusive. Similar concerns are shared in several sectors of the economy, calling for bridging finance from government amid the weakening domestic landscape. Our exports have declined very strongly on the back of recessions in many parts of the world. Botha says that this will have a significant impact on the mining and manufacturing sectors. “We know that mining, manufacturing and retail sales are already in recession, as is the motor vehicle industry. Growth in retail sales plunged into negative territory in 2008, the first negative annual growth rate in nine years. On a monthly basis, December's data was the eighth consecutive monthly decline in real retail sales.” he adds. The property market has also been in decline for some time now, impacting hugely on occupations such as real estate agents and parts of the legal fraternity such as conveyancers and attorneys. He points out that one difficulty with rescue packages or bridging finance is to decide which sectors require assistance, for example, helping the motor components industry vs estate agents vs textile workers. This is apart from the capacity problem that state departments will face in managing such assistance. On a more positive note, with regard to tourism, South Africa is now high up on the list of favourite destinations, and is hosting the Confederation’s Cup this year and the World Cup next year, so are we not expecting this to boost our local economy? “Tourism is important, but many countries are experiencing economic and financial hardship. This will without doubt have a negative effect on the number of tourists coming to these shores. The soccer events will have an impact, but the duration will only be for four weeks or so for each event so the importance of these events will mostly be in the form of improving sentiment in and towards South Africa,” says Johan. “We therefore have to get the hosting of the events right. Improved confidence and sentiment in an environment of falling interest rates and inflation (and improvement in the global economy) may just be the combination of factors we need that will stimulate the economy. We are fairly optimistic that 2010 will see a much better performing economy.”