Statistics came out this week showing the largest South African GDP drop in more than a decade. The data showed us that the drop in Q1 was 3.2%. Estimates before the release were sitting at a 1.6% decline, reports BusinessTech. Manufacturing and mining were the major causes of the GDP drop. Consumer spending, or the lack thereof, also had a big part to play.
More Drama For SA Economy
The drop announcement caused shock in the markets causing the Rand to tank almost immediately. The Rand has hit R15 to the dollar on Thursday, starting the day at R14.85. Further bad news hit the country on Thursday when Moody’s warned of an increase chance of SA going into a recession.
Things are not looking great for the country’s outlook as a whole. Many are looking at Cyril Ramaphosa for answers after his recent success in the national elections. At this stage it seems that there is not much he can do to try and fix the plethora of problems the country currently faces.
How Have Consumers Affected The GDP Shrinkage?
And why are consumers struggling? High levels of debt, high interest rates, increased tax burden on consumers with government continuously raising taxes (think sin taxes, fuel levy, road accident fund levy, VAT that pushed up a few years ago) and adding new taxes such as the carbon tax added to the latest fuel prices, rising unemployment to name but a few reasons.
There is just no excess money in consumers pockets that they can spend that will increase demand in the economy and starts creating a bit of growth.
South Africans have had to dig deep to try and stay above water each month. Many have to resort to short-term debt, heavy budget cuts and other borrowings.
Consumer Spending Behaviour
As soon as consumers feel that their money isn’t able to go as far they start making new spending decisions. Luxurious items get cut back, shopping trolleys become less full and retailers start feeling the pinch. When cash is low, consumers hold back on spending or else use more credit.
Credit cards, store cards and other short-term loans are used to bridge the gap between money running out and the next pay day. Excessive use of debt can get consumers stuck into a debt cycle. A debt cycle occurs when consumers are forced to make use of new debt each month just before they get paid. This cycle continues as debt is used to pay off other debt which in turn increase the consumers debit orders each month.