Bloomberg News

South African Consumer Spending Rises as Economy Recovers

June 21, 2011

(Updates with analyst comment starting in sixth paragraph.)

June 21 (Bloomberg) -- South African consumer spending, which accounts for two-thirds of demand in the country, and investment rose in the first quarter, reinforcing the recovery in Africa’s biggest economy.

Household spending increased an annualized 5.2 percent, compared with 4.8 percent in the previous three months, the Pretoria-based Reserve Bank said in its Quarterly Bulletin today. Growth in gross domestic expenditure accelerated to an annualized 8.3 percent from 2.4 percent as government spending surged and companies built up inventories, it said.

“The brisk consumption expenditure mirrored a further increase in real disposable income as property income and compensation of employees trended higher,” the central bank said. Government spending growth of 9.5 percent was driven by the purchase of military planes, it said.

Domestic spending had been slower to recover from a recession in 2009 than manufacturing as job losses mounted and household debt remained near record levels. The economy’s 4.8 percent annualized growth in the first quarter was driven by a 14.5 percent surge in manufacturing. Retail sales advanced 9.8 percent in April, while the consumer confidence index rose to 11 in the second quarter from 9 in the first.

Interest Rates

A recovery in spending may prompt the Reserve Bank to raise its benchmark rate from a 30-year low of 5.5 percent as inflation begins to pick up. The central bank has forecast inflation, which was 4.2 percent in April, will breach the 3 percent to 6 percent target in the first quarter of next year as international food and fuel costs and domestic energy prices climb.

“Obviously the central bank can no longer say domestic demand is weak,” said Michael Kafe, an economist at Morgan Stanley in Johannesburg. “Real wage payments in South Africa have gone up in the last two years so it is not surprising that spending has held up. On the whole, these are very solid growth rates.”

Disposable income grew 5.4 percent in the first quarter compared with 5 percent in the previous three months, the central bank said. Spending on durable goods, such as cars, jumped 21.5 percent.

While crude oil fell to its lowest in four months in New York yesterday, it has gained about 10 percent over the past year. South Africa’s power utility Eskom Holdings SOC Ltd. may raise electricity tariffs 25.8 percent for the year through March 2012, according to the country’s energy regulator.

Rand Strength

A 39 percent gain in the rand against the dollar since the end of 2008 helped contain the pass-through to domestic prices, the central bank said. The rand strengthened 0.3 percent to 6.7632 against the dollar as of 10:40 a.m. in Johannesburg.

Rising wages are also adding to pressure on inflation, although the pace of increase in pay has moderated compared with previous years, the central bank said. Wage settlements averaged 8.2 percent in the first quarter, the bank said, citing data from Andrew Levy Employment Publications.

Household debt eased to 76.8 percent of disposable income in the first quarter from 77.6 percent in the previous three months.

Gross fixed capital formation, including state-owned companies and the government, increased 3.1 percent, up from 1.5 percent in the three months through December, the Reserve Bank said.

--Editors: Philip Sanders, Alastair Reed

To contact the reporters on this story: Gordon Bell in Johannesburg at gbell16@bloomberg.net.

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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