“In a potential full-blown oil price shock scenario, including a resultant economic slowdown and inflation-driven interest rate hiking, transport and hospitality-related spending could be significantly impacted as consumers make spending adjustments.”
These are the words of independent economist John Loos, who says that any forecasting about the conflict between Israel/the US and Iran in the Middle East is a hazardous business, but “…there is a high degree of risk to the (local) economy that is important to note, which poses major risks to global oil supply.”
There are a few mechanisms through which a mounting global oil shortage and price shock can feed through to the South African household sector, and it is more than just about the direct impact on domestic fuel pump prices, he says.
"Firstly, if oil supply to the world is restricted due to the conflict situation, it can mean that global economic output is restricted because the world economy is an energy-intensive place. So, if it gets bad enough, it can mean the world going into recession, or at least a major growth downturn.
Three major impacts on SA
“For South Africa, that would have a negative impact on demand from other countries for a wide variety of South Africa's exports, be it manufactures or minerals. Therefore, South African exports could slump, potentially resulting in those export-driven sectors either curbing new employment or even implementing job cuts. It could also mean cutting certain input suppliers’ services, in which case the suppliers would be restricted on jobs (i.e., a ripple effect through the economy).”
The second impact is via prices,” says Loos. “A scarcity of oil in the world implies a higher oil price. Not only does this have a direct impact on how much consumers pay for fuel domestically, but petrol/diesel prices are a major input right down the supply chain, so with some lag it feeds through into the prices of other consumer goods too. Many products may thus experience higher price inflation as a result, leading to a higher consumer price inflation rate overall and that eats into disposable income too.
“It then goes further to a possible third important impact, because the South African Reserve Bank (SARB) has a 3% CPI (Consumer Price Index) inflation target. Should an oil price shock lead to a noticeable rise in consumer price inflation, the SARB could possibly start to hike interest rates. A higher cost of repaying outstanding credit would further eat into disposable income, and raise the cost of many new credit-dependent purchases.”
How consumer spending will change
Based on these factors Loos says that consumer spending responses will come in three ways:
A cut back on spending on luxury and non-essential items. While some may think this only includes the likes of high-value goods such as jewelry for instance, it can actually be far broader than that. Even certain foods and eating out can be regarded as luxuries and non-essential. Holidays, too, are in many instances not essential.
Put “postponable” spending (often essential items) on hold. Many postponable expenditure items are low-frequency purchases that fall into the durable or semi-durable consumption goods categories. For example, a motor vehicle that is getting old but is still in running order. While the time might be approaching for a replacement of such products, the purchase of the replacement can often be postponed for a significant length of time. This is often the case with furniture and household appliances, or clothing and footwear, for instance. Certain maintenance on homes and cars can also often be delayed.
Credit-dependent purchase items, including vehicles, other durable consumer goods such as furniture and appliances, and home buying, can be postponed by many during times of interest rate hiking. Some aspirant homeowners often prefer to rent or remain in their original family homes for longer in such times. This would be the likely result of an increase in interest rates.
While not always a wise idea, some households even cancel certain forms of insurance, vehicle maintenance, or scale back on medical cover.
“Should the current events unfolding (in the Middle East) continue into a full-blown inflation shock, with interest rate hiking and economic growth slowdown, I would expect the aforementioned consumer spending categories to be among the most impacted,” says Loos.
