Swimming upstream against consumer spending trends

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July 8, 2020
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August 13, 2020

On the 5th of March, South Africa confirmed its first coronavirus case and less than a month later, the country had already completed a full week under lockdown. In this month, consumer spending took a big knock as by the first few days of the lockdown, consumer spending fell to a low of 28% for the same period in 2019.

The drop in consumer spending came as the coronavirus pandemic closed entire sectors of the economy, caused widespread panic, and led to an increase in unemployment unlike the country had ever seen before. From these indicators, it is clear that consumer spending will stay unstable for quite some time. And since the start of the lockdown, consumer spending has remained low. At the start of May, the World Economic Forum predicted that for the first two weeks of the month, consumer spending would still decrease on all economic fronts apart from essential groceries and home entertainment.

Furthermore, estimates from the IMF in April’s World Economic Outlook projected South Africa’s GDP growth for 2020 to be -5.8%, with many other countries also showing a negative GDP projection. However, all attempts to predict what might happen to the economy by the end of the year will seem like wild guesses until the economy stabilises somewhat.

This worrisome GDP projection for South Africa followed on what was already a recession, as the last two quarters of 2019 showed negative growth. The continued recession means that consumer spending will be down for a long time. However, it does not necessarily mean that everyone is equally affected by the weak economy.

Those who have not been as adversely affected, are finding themselves in positions where previous expenses no longer exist. This means that some even find themselves saving money during the pandemic. This is not the norm, at least not in South Africa. Other countries, although showing similar trends in the decline of consumer spending, have put their saved money to good use. Households in the UK, for instance, have repaid a collective £7,4 billion in credit debt during the month of April.

It should be kept in mind, however, that consumer spending is only a reflection of the wider economy. It does not directly impact consumers as much as the factors that cause it. Yet for those who have been able to retain their jobs, salaries, and assets, it does mean fewer opportunities for spending and provides an opportunity to make good use of the money saved.

For instance, with repo rates being cut to aid the economy, it means that you save money with your monthly bond repayments to your bank over the same period. Even though it may be tempting to spend the money saved, it may very well be put to good use in continuing to repay the instalments as if no change occurred. In this way, you pay off your debts quicker in the long run.

Repo rate cuts are meant to lead to increased borrowing and to encourage consumer spending, which is especially necessary for the economy in a time such as the pandemic and helps keep the economy from crashing beyond reasonable repair. But if there is no need to borrow money or spend, it is better to hold on to the money saved. If you are working from home, the money you save from your daily commute could also make a big difference to your financial outlook in the long run. The same goes for money saved on entertainment and dining costs, leisure activities, and vacations. If you save money while the economy is struggling, it is best put to use by repaying debts with a variable interest rate.

If you have no debts that require attention, instead of spending the money saved on things that will depreciate in value, or ordering from Uber Eats every other day, it may be a lot better to invest in the long-term. This is because long-term investments will also pay a lot more dividends once the economy starts returning to normal levels of growth and interest rates inevitably go up again.  So even though the effects of COVID-19 have caused the economy to shrink, for those who are not directly impacted, it does present an opportunity for personal financial flourishing. Swimming upstream against consumer spending trends means that every cent saved is an investment to be made.

Reference list

https://www.bankservafrica.com/blog/post/what-our-data-tells-us-about-consumer-spend-during-the-coronavirus-era1
https://www.weforum.org/agenda/2020/05/coronavirus-covid19-consumers-shopping-goods-economics-industry
World Economic Outlook, IMF, April 2020
https://www.bankofengland.co.uk/statistics/money-and-credit/2020/april-2020

This article is a general information sheet and should not be used or relied upon as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your adviser for specific and detailed advice. Errors and omissions excepted (E&OE).