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Johannesburg - For small business owner Steven Setswe the news that South Africa is in a recession, didn’t come as a surprise. Before last week’s announcement that the country's economy had officially entered a recession, he could see his business and lifestyle deteriorating.
“I had to cut down on personal luxuries such as holidays in order to keep the business afloat as customers tightened their pockets,” he told Fin24, adding that he had made significant cuts. One of the biggest casualties has been eating out at restaurants, but other small luxuries also had to go as Setswe did more with less.
South Africa was indeed in trouble, long before last week’s alarming declaration. The country’s gross domestic product (GDP) figures for the first quarter of 2017 were once again dismal, following on the two last quarters where the economy contracted. For most consumers the announcement only confirmed what they had been suspecting for a year – there is less money going around these days.
GDP‚ which measures the value of goods and services produced‚ fell by 0.7% in the first quarter of 2017 compared to the previous quarter‚ Stats SA said. Finance, retail and business services, which contribute about 20% to the GDP, shrank by 1.2%, the first contraction for these industries since the last recession. Consumers are tightening their belts in terms of expenditure on GDP, household consumption in the first three months of this year declined by 2.3%. Households cut spending on food, restaurants, recreation, transport and clothing.
WATCH: South Africans struggle to make ends meet
Stats SA deputy Director-General of Economic Statistics Joe de Beer said there was a clear link between the fall in household consumption expenditure and the decline in trade. About 60% of GDP is driven by the consumer. But the consumer stopped spending”, said Maarten Ackerman, Citadel’s chief economist.
READ: Could it be an extended recession?
Pensioner Dhaya Archary said he is definitely spending less.
“I’m heavily affected by the recession,” he said, adding that his pension money is too little to cover basic necessities and utility bills
Retailers feeling the pinch
Massmart CEO Guy Hayward told the company’s AGM last month that Massmart initially had high hopes for 2017. But the hopes of a recovering economy “were unfortunately washed away by the negative economic impact of political events in late March.”
He said the unfavourable impact on sales in its discretionary product categories, such as general merchandise, has been notable and appears to be as strongly linked to weak consumer confidence as it is to underlying economic issues.
Clothing and furniture retailers such as Mr Price, Truworths and The Foschini Group have also reported disappointing results, saying that consumers are simply not buying enough at the moment.
READ: Mr Price shares surge despite first earnings slump in 16 yrs
Reduce personal debt
Economists have warned that despite the urge to turn to credit to maintain a certain lifestyle, people should simply not borrow any money, but learn to live within their means. Phamela Nzuza, a claims consultant, agrees.
“I do not embrace credit because of the possible constant increase in debt,” she said.
Lizl Budhram, head of advice at Old Mutual Personal Finance advise consumers to counteract rising interest rates and reduced access to credit, consumers should focus on growing emergency savings funds, and make a concerted effort to reduce personal debt.
Low prices in a recession
Retailers would be reluctant to hike their prices in the current economic conditions, economists believed. With less money in their wallet, and consumers looking for the best bang for their buck, retailers are likely to slash prices to still attract consumers.
Nedbank’s chief economist Dennis Dykes said producers are well aware that consumers are spending less.
Less jobs, less increases
But business is still likely to slow and companies are sure to recover losses by limiting increases and hiring less people. At the moment unemployment is at a 14-year high of 27.7 percent.This all adds up to less money being available in the overall economy for spending. “The amount of cash in people’s pockets will be fairly constrained‚” Dykes said.
Unemployed Obaken John Setidisho told Fin24 that jobs have simply dried up.
“Job opportunities in the private sector have become more difficult to get because the private sector is no longer hiring,” he said. He now only buys the essentials and had to cut down on luxury grocery items and now only buys the essentials.
“Foods such as fresh meat have become a luxury. “
Lipstick and Second Hand Car Indexes
Dumisani Bengu, head of franchise at Absa believed that despite the recession the healthcare, beauty and body culture sector could escape the pinch, thanks to the famous lipstick index theory. Then-chairman of Estee Lauder Leonard Lauder coined the term back during the days of the 2001 recession when he noticed hat year lipstick sales rose despite consumers cutting down on luxury items during difficult times. His theory is that women facing an uncertain environment turn to beauty products as an affordable indulgence while they cut back on more-expensive items.
READ: In tough times, US women buy nail polish
“The ‘lipstick effect’ to continue driving growth in the health, beauty and body culture sector,” Bengu said.
He said sales show continued growth even in times of economic down-turn. “According to 2016 FASA research, the healthcare, beauty and body culture sector accounted for approximately 5% of the total franchise sector and this is predicted to increase going forward.”
While figures from the the National Association of Automobile Manufacturers in South Africa (NAAMSA) showed that the new vehicle market was dogged by double-digit or near-double-digit year-on-year declines, the second hand car market could flourish.
But Bengu said there was a growth in the used vehicle market and auto services sector as consumers keep their cars longer
