Inflation is expected to drop below 5% by midyear, but consumers will be facing a challenging first half of the year, said an economist.

Speaking at a quarterly investment update on Wednesday, senior economist at Old Mutual Investment Group, Johann Els said that the outlook for the South African economy is more optimistic.

However, consumer confidence remains low and until inflation comes down, followed by an interest rate cut, consumers will feel the pressure of higher tax rates.

“The first half of the year will be fairly tough on the consumer, not as bad as the 2008/09 cycle, but fairly tough,” said Els.

Inflation is expected to fall gradually,  which will be followed by rate cuts in the second half of the year, but for now the budget’s tax hikes will be tough on consumers. “Everyone is going to pay higher taxes,” said Els.

Els said that the tax scales had not been adjusted for inflation. Wage increases will push consumers in the next tax bracket and ultimately taxes will eat away from the salary increases.

He added that the budget was one of the “better” ones in the last few years. This year Finance Minister Pravin Gordhan stuck to the deficit target of 3.1% set out in the mini budget in October.

“Overall, the budget was negative for South African consumers,” said Momentum Investments economist, Sanisha Packirisamy. “As government attempts to stick to its fiscal consolidation plan and debt targets in a low-growth environment, we are likely to see South Africa’s tax burden drifting higher.”

The tax-to-GDP ratio is expected to increase from 26.2% to 27.2%, with expectations to rise further in the longer term if additional tax measures are implemented, she said.

The rising tax burden and fiscal consolidation implies that spending power is being removed from the economy, explained Packirisamy.

“While Treasury have put these measures in place in the short term, longer term a leaner government and deficit reduction are necessary to positively impact the private sector and overall growth,” said Packirisamy.

Low consumer confidence

Els had explained that businesses had reduced investment and consumers were not spending due to low confidence levels. “The confidence crisis is holding back better economic growth,” he said. The political climate has dampened confidence, and has constrained investment. So far private investment has dropped 9.5%.

“The lack of certainty and confidence holds back the economy,” said Els. The growth outlook has improved to 1.3%, said Els, although it is not strong it is better than last year’s 0.3%. He added that a “confidence recovery” is necessary to improve the growth outlook.

Employment levels are steady, and wage and salary growth is above inflation, which is good for consumers, he said. The disposable income growth is also “fairly stable” compared to the global financial crisis during 2008 and 2009 where over 860 000 jobs were lost.

“We don’t expect significant job gains, but there will be a stable job environment and wage and salary increases above inflation,” he added.