Recession: Wake up call for SA consumers

In the last quarter of 2019, seven out of the ten broad industries that make up the GDP, contracted. However, according to Sebastien Alexanderson, CEO of National Debt Advisors, it is one of the sectors which increased which should be cause for great concern.

“By now we have all seen the stats which indicate that:

• The transport, storage and accommodation industry fell by 7.2%
• The agriculture, forestry and fishing industry contracted by 7.6%
• The construction industry also fell by 5.9%
• The electricity, gas and water industry contracted by 4%
• The manufacturing industry declined by 1.8%
• General government services decreased by 0.4%

However, the statistic that concerns most of us in the debt industry, is the one that indicates that household spending increased by 1.4% in the final quarter of 2019, but in particular, that spending on clothing and footwear was up by 8.5%.

This is a clear indication that South Africans are once again in a spending frenzy, very similar to the pre-2007 global recession, and are oblivious to the impact that a recession and possible downgrade to non-investment grade “junk” status might have. We are staring financial disaster in the face.”

The state of consumer debt before the recession

Consumer debt in South Africa increased to R1.72 trillion in outstanding debt, according to the Consumer Default Index (CDI), released by Experian South Africa in December 2019. Figures also show that as many as 40% of South Africans who have debt, are unable to keep up with their monthly repayments.

Yet, South Africans continue to spend and live beyond their means. Alexanderson goes on to say, “It’s as if the South African consumer does not see, or are seemingly unaware (because of the severe lack of financial education in South Africa) that what happens at a macro-economic level, does have impact at household level.”

The effect of the recession on South African consumers

This recession will almost certainly see Moody’s downgrade South Africa to “junk” status in the near future. Should that happen, there will probably be continued currency weakness. This will in all likelihood lead to the Reserve Bank increasing the repo rate – and ultimately the South African home owner will end up paying more on their home loan. Increased home loan repayments will undoubtedly put a strain on already struggling households.

With all of this looming, Alexanderson urges South Africans to take stock of their finances – before it is too late. He advises:

• As simple as the task of drawing up a budget may sound, consumers should never underestimate the value of budgeting. Everyone needs to stare their financial situation in the face. A truthful budget lets one do just that.
• Get rid of your debt ASAP.
• Stop unnecessary spending.
• If you are fearful of the repossession of your assets, speak to a debt counsellor.
• If you have an investment portfolio, speak to your financial advisor about diversifying your portfolio. With the rand weakening, it will stand you in good stead to invest outside of the country.

We also need to be cognisant of the fact we are just over two months into 2020, and South African companies have announced plans to cut more than 10 000 jobs. Telkom, Massmart and Ellies have all started the process of cutting jobs.

Slow economic growth, a technical recession, enormous consumer debt, impending “junk” status, the ever-present loadshedding and looming unemployment should all serve as the wake-up call many South Africans need, says Alexanderson. “The consumer bubble has burst. South Africans are going to have to curb their spending, get rid of their debt and start saving for the proverbial rainy day, which now, seems closer than ever.”

Sebastien Alexanderson is the CEO of National Debt Advisors, one of the most successful debt counselling firms in South Africa – and has headed up numerous financial companies across the globe in the past 20 years.