475 Basis Points Down the Line, What’s Breaking and What isn’t? A South African Fairy Tale.
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A high-interest rate and inflation regime has the potential of crippling economic growth: High costs of debt and prices slow down consumer spending, which reduces corporate revenues and profits, thereby increasing unemployment, which loops to have spending reduced again, in a self-reinforcing loop that can unravel quite viciously. While conclusions on both the speed and ultimate impact (recession or not) of the unraveling in such a regime are inconsistent, what’s not is the narrative that “something will break.” 475 basis points down the line, what has and has not?
Consumers.
In the first quarter of 2023, consumer spending grew by 0.4%, building upon the positive expansion of 0.7% witnessed in the fourth quarter of 2022. Meaning, consumers remain resilient and somewhat stable, despite the current high interest and inflation rates.
Looking at the savings and household debt-to-income numbers, it is evident that the savings ratio has worsened, from 1.7% in mid-2020 to 0 in January 2023, along with the debt-to-income ratio, from 62% in 2021 to 66% to date.
Here is the takeaway: Consumers are resilient; however, they have had to tap into their savings to spend, moreover, their marginal expenditure is increasingly being financed through debt, which raises concerns about the sustainability of spending. While figuring out, with accuracy, how high rates would have to rise to totally squeeze consumers out of financing expenses through debt can be difficult, realising that this is a bad omen is not. Consumers aren't breaking, they are bending, and triggering the events that will exacerbate the demise should we stay in this regime for longer (high rates and high inflation).
Corporate.
Most sectors are faring decently, evidenced by the growth, contributing positively to 2023 Q1 GDP numbers (0.4% growth). The development is primarily fueled by exports, driven by the favorable exchange rate international buyers get from a depreciated Rand, albeit positive it leaves room for concern about local trade.
At a macro glance, while triggering trends are evident, little seems to be breaking, however, if you sniff around the hood, you have a few public companies missing earnings estimates, some closing shop completely, a few consumer and corporate debt delinquencies, retail trade sales decreasing, motor sales decreasing as well as property sales.
In conclusion, consumers remain unsustainably resilient, and while overall growth has remained positive, there are signs of strain on the corporate front. The further down the continuum we go, the more these factors will consolidate to have an impact on the bigger scoreboard (GDP and unemployment numbers), most likely when breakdowns become obvious.