South Africa’s consumer crunch

Jeremy: Consumers in South Africa entered the second half of the year on shaky ground. Household finances were already under strain before higher fuel prices, rising inflation, and renewed global uncertainty added another layer of pressure.

Yet the picture is not entirely bleak. Fuel prices are falling. The rand has shown some resilience. Wage growth is gradually improving. The question is whether that relief will arrive quickly enough for households already feeling stretched.

Then, of course, there's the weather, with early forecasts suggesting South Africa could be heading into an El Niño cycle later this year, potentially bringing below-average rainfall across parts of the country and raising fresh questions about food prices and inflation in 2027. So where does that leave consumers in South Africa?

Hello, I'm Jeremy Maggs. This is No Ordinary Wednesday, Investec's fortnightly podcast. In this episode, we're going to examine the forces shaping South African consumers, from fuel and food prices to wages and interest rates.

It's a pulse check on the household sector that accounts for roughly two-thirds of economic activity and remains one of the most important drivers of growth. Joining me is Investec Chief Economist, Annabel Bishop.

Annabel, welcome back.

Jeremy: Let’s start with a broad understanding of consumers in South Africa right now. We know they are the engine of the economy. How would you assess the health of the consumer right now?

Annabel: I think we know we're going through a bit of a difficult patch in South Africa, given the oil price shock and the impact on fuel prices. But just to have a look at where consumers were when that started, and consumers did start the second quarter on a weak foot. Spending growth essentially stalled in the first quarter at 0.1%. The drop came as consumer faced the financial hangover from a festive period.

Obviously, there was some credit stress. So that's not unexpected for the first quarter of a year. We talk about January-worry, for example. But typically, consumers do tend to see improvement over March and particularly into obviously April and the second quarter. That's where we've really seen some difficulty.

The bottom line, I think, is that, while we obviously are going through a more difficult period, this is not something which is expected to be structural and really not even something cyclical, but more of a once-off event.

Jeremy: Annabel, I suspect that you can also do some broad economic extrapolation here. What does the household sector then tell us about the growth outlook moving forward?

Annabel: With consumers experiencing quite a poor hit in the second quarter, disposable income suffering from substantially higher fuel prices, which are expected to be temporary, and we've already seen some moderation, the economic impact for 2026 is likely to see GDP growth of maybe 1.3% instead of 1.5%.

Interestingly, that's not only our view, but it's also has become consensus view as well. So, this talks to the fact that there's likely to be a moderate impact on the economic outlook, and I think that's absolutely key. Consumers are the vital driver, the engine for the South African economy, close to 70%. And with the household consumption expenditure output itself this year running at closer to probably about 1.8% from an expectation point of view, you can see that a lot of the drop-down has rather come from the heavy hit to the trade account.

As we know, consumers will continue to spend their incomes whether they have to spend less on one item and more on another to afford the fuel price hikes. Overall, they're still spending the same quantum. So really where the impact comes in from the consumer instead will obviously be on the inflation side. But we do not think there's going to be a enormously detrimental impact on the economy.

Of course, we've seen some escalation in the Middle East recently. Expectations are still for a fairly good GDP outcome, but much will depend now how long this latest flare-up occurs in Iran and in the Strait of Hormuz, and of course, if it worsens or not.

Jeremy: Across all data points, Annabel, is there a single pressure point that matters most right now?

Annabel: I think if you're looking at inflation it obviously would be transport. That really has come through with a very big impact and differentiated against different income groups. I think this is also quite interesting as well.

There's been this very substantial jump in the cost of living or consumer price inflation pressures, as you're talking about, faced by South Africans this year because of the oil price shock in the Middle East. We started the year with expectations of a benign inflation environment. There wasn't anticipation that we'd see inflation rise to 4.5%, which is where it is now. The expectation was it would average 3%.

The benign inflation outlook has changed, placing significant upward pressure on household finances, which as we said earlier, already showed higher debt pressure in the first quarter. Interestingly, income earners of over about 300 and maybe 10,000 per annum, they've really seen inflation jump from 3% to 5% in May, and that's the latest inflation figure.

So, in a way it's almost an income group story as well, which is quite key. If you look at your lower deciles, and if you look at the inflation figures where you have for example 2.6% inflation figure, and it's actually dropped to 2.3% for very low-income earners, they haven't had such a big impact from a fuel price perspective. These often tend to be people who are not traveling very much, low-income earners and typically unemployed individuals. That even has seen falling inflation rates right up until your middle decile number five.

This is very fascinating because if you divide income earners in the South African economy into 10 income groups, people who are earning around R300,000 a year are actually in the upper income strata.

This is where the bigger impact has come from the fuel prices and that's really been a key sticking point. So really the bottom line for consumers is that if you divide the incomes in the economy into 10 groups, your upper income group has really seen inflation rise dramatically from 3%, as we said at the start of the year before the fuel price increases, to 5.3% and likely moving towards 6%. Whereas the lower income deciles, the lower income groupings, if you will, one to five, they've seen inflation fall from around 2.5% close to 2% for the lowest income group and even for the mid group from three to about 2.9-2.7%.

This talks to the fact that there's been quite a different experience across consumers in the South African economy in the face of the oil price shock.

Jeremy: Annabel, as you've referenced, consumers were already under pressure before fuel prices surged. So, one's got to wonder then how much damage the oil shock has done and are households still feeling the worst of it?

Annabel: Yes. As we know, the first fuel price hike came through in April this year for South Africans. Even though the Middle East war, the oil price shock, began at the end of February, the month of March was one of calculation where government in South Africa looked at what the impact would really be for consumers. And only in February did we see the first jump.

In fact, the second quarter of this year saw petrol prices rise by R7.76 a litre and that's a very big jump. And of course, the big impact that it has really had for households. The diesel price rising by about R9.35 for those who drive diesel vehicles. That has cut household purchasing power. It's affected household finances. So, this really means a number of goods and services consumers can buy with their same income, if we don't have any salary or wage changes, that declines.

Consumers can buy less and this negatively impacts households, as we said, in the second quarter, while high interest rates also eat into disposable incomes. Let's not forget that we have also seen the Reserve Bank hike interest rates in May by 25 basis points. Given the latest flare-up in the Middle East, may well do so again now in July.

So, there's been this differentiation. You talk about how much of this has reached households and how much has worked through. Most of it has come through on a direct causal impact, higher fuel prices straight into the impact on finances and straight into inflation that way.

There has not been evidence of second-round effects, evidence of other goods and services’ prices rising meaningfully. There might be a very slight movement here or there, and that's even hard to discern whether it's due to fuel prices. But really, it's just been this straight direct effect that's come through so far.

With the Reserve Bank hiking interest rates in May, they did it pre-emptively because they believe there may be some second-round effects but those are yet to manifest if indeed there are any. That's where we'd look at higher food prices, for example, which haven't occurred, but should they occur because, for example, fertiliser costs prices have gone up. Agrichemical costs have gone up very substantially.

The good news is that they went up and they came down again. The same obviously for diesel and petrol prices, we've seen a few fuel price cuts. Overall, there hasn't been much impact at all on other categories in the CPI basket.  It's just mainly been on fuel prices and that's really where it hits your higher income earners.

Jeremy: From a longer perspective, the SARB meets again on the 23rd of July. Before we get to what might happen, on a broader canvas, how has the consumer responded to the interest rate environment that we've had over the past 12 months?

Annabel: The Reserve Bank has noted that out of total household expenditure, the average household spends close to 16% on transport under normal conditions, and this increases in fuel price jumps, which obviously then really strain households.

The consumer has really seen an interest rate cut cycle over the past few years. This interest rate hike that we saw in May was the first one. It was a turn in the cycle. If we look at how the consumer responded to interest rate environment we've had over the past year or even the past few years, consumers have benefited.

They have seen cuts; inflation drop down and a low inflation target. It has been very beneficial for consumers. Now, of course, as we noted, there was no cut in interest rates in the first quarter of this year, and instead there was a hike in the second quarter. But even it's a very modest hike. I don't think it's had a major impact yet.

Of course, if we go through a series of interest rate hikes, we see another one in July and perhaps further in the year, that's not expected. It's not the base case. If we are going to get a series of interest rate hikes, we may get another one in July, but it's not expected to be persistent. That will of course then have a more serious impact on consumers who will then have to cut back further in terms of expenditure.

This is all being done to limit inflation. CPI inflation on average is at 4.5%, while CPI inflation may be at close to 5.5% for your upper income earners. This is where you see people, as we said before, that the top income bracket in South Africa being calculated by Stats SA around the R310,000 mark. If you look at that per month, it's probably around 25,000 rand a month.

But that's something which is not the average experience, but it doesn't really matter for the Reserve Bank. Some other income groups might be seeing inflation falling overall because inflation is no longer at the 3% inflation target range and it has moved to 4.5% and may move towards 5% and if not above this year. That is why the Reserve Bank would then consider hiking again.

And of course, that's when you're going to see an impact to consumers as we start to see the cumulative effects of high interest rates. It really takes probably two to three quarters, if not four quarters, for the full effect of interest rate hikes to feed through. But nevertheless, consumers do need to brace for this potentially.

Jeremy: The MPC, from what I understand, faces something of a trade-off here. Does higher inflation rule out then rate relief, or does weak growth such as we experience still keep the door open?

Annabel: Yes. The South African Reserve Bank's primary objective is price stability. So, they will focus on inflation, to answer your question quickly. The inflation outlook, however, is what's most important for the Reserve Bank. They make a judgment on where will inflation be in six months to 12 months' time? And as a consequence of that, they would adjust interest rates now or not do so to try and seek to control, alter inflation in that period.

They don't do the same with economic growth. We don't target economic growth. It's not something which is looked at in terms of the inflation targeting framework. The real sticking point for economic growth in South Africa is structural, as the Reserve Bank themselves have said many times, and that is the fact that we, despite improvements, still see big structural impediments to economic growth at the ports and in other areas of the economy from an infrastructure perspective. We’ve talked before about the difficulties in bureaucracy, red tape, and there's still the difficulty in investing in the mining sector. Another discussion for another day.

The Reserve Bank will really focus on inflation. They’ll look at things as well like the exchange rate, and what exchange rate movements mean for inflation. There was a comment recently by the governor saying we've had lower oil prices, that helps on the inflation outlook. But then, most recently since his comment, we've had much higher oil prices.

So, we don't know exactly what's going to happen next week when we see the MPC decision, because we don't know exactly what's going to happen in the Middle East. If we see a collapse down oil prices back towards $70 a barrel, most likely no interest rate hike. But if they stay sticky where they are, the Reserve Bank may consider another precautionary increase.

Jeremy: Let me circle back to that oil price debate then. Fuel prices, Annabel, we know rise very quickly, but obviously fall more slowly. Could you explain to us, and maybe this is just a straight economics 101 question, why the descent is so uneven, and what does that mean for inflation?

Annabel: It's a good point because when the oil price leapt up from $65 a barrel before the start of the oil price shock, and at one point went to a $120 a barrel. We were in line for a bigger petrol price jump than we did see. That is because government took off about R3 to R4 a litre in the general fuel price levy. So, oil price shocks typically do this. You see a massive and very rapid escalation in fuel prices. Then that market shock is typically slow to unwind if there's uncertainty, perhaps about the impact and the outlook, or there's uncertainty around the war and how long will it take to get the ships flowing again to get oil prices moving.

We’ve had a slightly different event that globally the high fuel prices, gasoline, that's petrol for us, and gas oil, that's diesel for us, have seen quite big drops, even agriculture as well, because such substantially higher prices have really increased margins. There's been a lot more production and bigger suppliers push down these prices.

We import all our fuel, or we price all our fuel in South Africa on petroleum product imports. Those have been benchmarked against international fuel prices. They've seen a decrease, but it hasn't been quick enough because there are still supply constraints. There are still issues. But nevertheless, fuel prices are expected to continue to come down, just not as rapidly as they went up in the beginning.

Jeremy: Annabel consumers will rightly ask whether wages are keeping up with the costs that households feel or is real income still being squeezed?

Annabel: That's really the sticking point. Take home pay fell, disposable income, by 0.8% in April. April was the first month we saw a jump up in inflation because we obviously saw that was the first month that fuel prices came through and yes, disposable income fell. So, wages are not keeping up with inflation.

In May again we also saw real wages fall again. This has really made it quite difficult for consumers. If we have perhaps seen salary and wage increases maybe of 3% because that was the expectation that inflation now having reached the target that early this year, maybe in January or February wage setting, was really agreed around perhaps 3% or decided on a 3%. And then suddenly by April we had a fall and then May a 4.5% inflation rate. Possibly by June we might go to about 4.6%, but then we could tick-up towards 5%.

That means that you really are not keeping pace at all, and that cut in terms of real incomes will obviously make itself felt in terms of weakening economic growth as fewer goods and services can be afforded by consumers.

Jeremy: And if that's not enough, Annabel, then there's the weather. So, let's talk about the El Niño risk later this year. Obviously, it could add a food price shock to the fuel shock. Did we learn anything from the last big episode?

Annabel: El Niño's very interesting for South Africa. The El Niño means drought for South Africa. It means not only pressure on supply, but particularly pressure on prices. El Niños in the past have really pushed up, they've ramped up inflation. Having a look at the El Niño itself as it develops, it's a weather pattern and it could be perhaps more severe or less severe than is being anticipated. Certainly, the international weather bodies who monitor this have said it's going to be moderate. It's not going to be a light or easy one, and it could well develop into a severe one, and perhaps a very severe one.

The last time we had a severe El Niño in South Africa was when we were in the 2015-2016 period. There was another one in the early 2020s but the 2015-2016 was a severe one, which is potentially being indicated for the current weather phenomena that'll come through.

That really is seen to come through in the November to February period in terms of most of its severity. Obviously, a lot depends on how long it lasts for, when it does occur, whether it does develop into a severe or very severe El Niño weather phenomena, or whether it does not. So still a lot up in the air.

We've raised our inflation forecast for next year to about 3.7%. We had an inflation forecast which was a lot lower than that for next year, and part of that was because you just have a big statistical base effect. As you saw inflation jump up in April this year because all the fuel prices went up. So next year, inflation would fall quite substantially because we find ourselves in a situation where we then see that statistical base effect suppress the outcome.

To return to your El Niño question. In the last severe El Niño, for example, fish, which one would think would be afflicted because of what happens in the ocean, it only has a weighting of 0.4%. It's less than a 1% weighting in the index, and it's immaterial to the CPI outcome. I think what we really need to do is have a look at the weightings of what are the areas of food, because drought affects food production, that could be affected more because of their weightings.

Even though we did see a jump up in the seafood and fish component by about 20%, the weighting of 0.4% had less than 0.1 contribution to CPI over the entire two-year period. Now, if you look at meat prices, those are weighted by about 5%, and cereal products similarly as well, and that of course is your flour - it goes into absolutely everything, whether it's biscuits or protein bars. That would have a bigger impact. When we did see cereal price inflation rise, it jumped from 4% to about 18% in the 2015-16 El Niño period.

That's what happens, food price inflation does jump into double digits and eventually has a 25% contribution. Now, that gave you a 1.1% overall, and CPI inflation rose by 12.3% from the end of 2014 to the end of 2016. It wasn't only food that was really infected. Yes, cereal products jumped up and meat products, but agriculture wasn't the main driver of the jump in inflation that period because the economy's seen quite a lot of maturation.

The inflation impact reflects the breakdown in terms of where goods and services and prices come from. That really affects consumer spend. With the economy becoming more sophisticated, more mature over the past several decades, a severe El Niño would have a much more detrimental impact to economy in the '60s or '70s or '80s than it would have an economy in the 2000s.

While we think there will be some impact, we don't think it's going to be as severe, even if it's a severe El Niño, based not only on the experience of the last one, but also based on the fact that there are many other goods and services which consumers now spend on, which obviously won't be affected by the El Niño, such as furnishings, household equipment, healthcare costs and transport.

That will dull the impact somewhat because overall the component of food is less than 20% in the CPI basket, and that of course includes beverages as well as other areas of agriculture. So different times and revisions to CPI baskets every five years by the Reserve Bank have brought in other goods which would be less affected. And we don't think it's going to be something which would be as severe in the past as it would have been in the '80s for people who could perhaps remember the detrimental impact that very bad El Niños had then.

Jeremy: Let's finish with this, Annabel, and maybe a project if we can. If you and I are sitting here in six months' time, what needs to happen for consumers to feel better off, and what is your biggest worry or what is the biggest risk that might derail that story?

Annabel: I think consumers would feel much better off if not only we reversed these fuel price increases of around R6/R7 - where we're sitting now. We've had some cuts and there's been a lot of movement. If we went back to where we were sitting in January or February in terms of fuel prices, and we even got fuel price cuts, that's an interest rate cut. That would obviously make consumers feel much better. But of course, that's not expected.

We expect to rather see a slower pace of return to normality in terms of fuel prices. Perhaps by the fourth quarter end of this year, we'd start to see the fuel price effect really work its way out, certainly by the end of the first quarter of next year. The Reserve Bank will remain caution. Interesting credit rating upgrades and many other factors also help in terms of making the Reserve Bank more comfortable in its interest rate environment, including the big improvement in our government finances and our low inflation target.

We've entered the crisis in a very strong footing with a low inflation rate, with improving government finances, fiscal consolidation, and of course the improvement in the investor climate. All of those are helpful, but we just need to get through the hump. We just need to get through this period of high fuel prices. And we don't expect there'll be a jump in food prices when the planting season begins in October/November this year from oil price shock. Instead, there's worries around the El Niño and how it'll affect our food component. But again, it's not expected to be very extreme.

It looks like we, we're probably in for the same type of stress that we've really seen from a consumer period for most of the rest of this year. But there really is a good signal that from next year, we should see consumers experiencing an improvement in their finances. Longer-term, we anticipate further interest rate cuts. We anticipate a return to the low inflation target, and that helps consumers from a real income expenditure perspective.

Jeremy: Thank you Annabel Bishop for joining me on this episode of No Ordinary Wednesday.

Now a new episode of No Ordinary Wednesday drops every two weeks.

To ensure you don't miss out, search for Investec Focus Radio SA wherever you get your podcasts and hit the follow button. Until next time, goodbye from me, Jeremy Maggs, and the entire Focus Radio team.

Disclaimer: The views expressed are those of the contributors at the time of publication and do not necessarily represent the views of the firm and should not be taken as advice or recommendations. Investec Limited and subsidiaries, authorized financial service providers, registered credit providers, and long-term insurer.

Focus and its related content is for informational purposes only. The opinions featured on the site are not to be considered as the opinions of Investec and do not constitute financial or other advice. The information presented is subject to completion, revision, verification and amendment.

Although information has been obtained from sources believed to be reliable, Investec Securities Proprietary Limited (1972/008905/07) or its affiliates and/or subsidiaries (collectively “ISL”) does not warrant its completeness or accuracy. Opinions and estimates represent ISL’s view at the time of going to press and are subject to change without notice. Past performance is not indicative of future returns. The information contained herein is for information purposes only and readers should not rely on such information as advice in relation to a specific issue without taking financial, banking, investment or other professional advice. ISL and/or its employees and/or other Investec Companies may hold a position in securities or financial instruments mentioned herein. The information contained in this document alone does not constitute an offer or solicitation of investment, financial or banking services by ISL. ISL accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits, goodwill or any type of financial or other pecuniary or direct or indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use of the reliance on information contained in this document, whether authorised or not. This document may not be reproduced in whole or in part or copies circulated without the prior written consent of ISL.

Full Investec Bank Limited disclaimer    

Focus and its related content is for informational purposes only. The opinions featured on the site are not to be considered as the opinions of Investec and do not constitute financial or other advice. The information presented is subject to completion, revision, verification and amendment.

Although information has been obtained from sources believed to be reliable, Investec Securities Proprietary Limited (1972/008905/07) or its affiliates and/or subsidiaries (collectively “ISL”) does not warrant its completeness or accuracy. Opinions and estimates represent ISL’s view at the time of going to press and are subject to change without notice. Past performance is not indicative of future returns. The information contained herein is for information purposes only and readers should not rely on such information as advice in relation to a specific issue without taking financial, banking, investment or other professional advice. ISL and/or its employees and/or other Investec Companies may hold a position in securities or financial instruments mentioned herein. The information contained in this document alone does not constitute an offer or solicitation of investment, financial or banking services by ISL. ISL accepts no liability for any loss or damage of whatsoever nature including, but not limited to, loss of profits, goodwill or any type of financial or other pecuniary or direct or indirect or consequential loss howsoever arising whether in negligence or for breach of contract or other duty as a result of use of the reliance on information contained in this document, whether authorised or not. This document may not be reproduced in whole or in part or copies circulated without the prior written consent of ISL.

Full Investec Bank Limited disclaimer