SL’s future growth from ‘higher private consumption’ – SCB report
View(s):Standard Chartered Bank in a global research report this week entitled “Sri Lanka – Waiting for the rebound” has signalled that Sri Lanka’s future growth will come from “higher private consumption”.
The report adds that this will be driven by both cyclical factors, like healthy remittance inflows, stronger asset prices and inflation being kept in check, as well as structural factors such as lower unemployment and a rise in GDP per capita.
Elaborating even more, the report noted; “We expect consumer spending to grow 6.5 per cent in 2014, after an estimated 5.3 per cent in 2013, on a number of cyclical (benign inflation, healthy remittance inflows, stronger asset prices, easier credit conditions) and structural factors (lower unemployment, higher GDP per capita). We note, however, that the credit cycle may take some time to turn, resulting in lower consumer spending growth than in 2010-12 when credit growth was strong (10 per cent growth on average). Public-spending growth is likely to slow to 1.5 per cent (from an expected 3.0 per cent in 2013), similar to the growth rate in 2010 when the drag on the revenue deficit was the same”.
Additionally, it also indicated; “Nominal wage growth should rise in 2014 – the 2014 Budget allocated an 18 per cent increase in the cost of living allowance for government employees (applicable to 13 per cent of total employed), effective January 1, 2014. The direction in the budget was also for private-sector employers to increase wages accordingly, so we can expect some spillover effects on broader industry. Simultaneously, inflation has been on a secular decline from its 9.8 per cent peak in February 2013 to 4.7 per cent y/y in December 2013. We expect inflation to remain benign over the course of this year, reporting a 5.2 per cent average annual rate in 2014, after 6.9 per cent in 2013. Real wage growth should therefore be healthy, supporting consumer spending”.
At the same time, the Standard Chartered report also commented in more detail on the trend of stronger asset prices, noting; “There are no official house price indicators in Sri Lanka, but average prices based on property advertisements show a sharp increase in overall housing prices (up 17.19 per cent y/y in Q4-2013), while apartment prices and land prices increased marginally (up 0.66 per cent and 1.25 per cent, respectively, in Q4-2013) – anecdotal evidence supports this data. Easier credit conditions over the course of this year should further support housing prices. On the margin, this could feed through to higher consumer spending, as around 76 per cent of housing stock is owner-occupied. Simultaneously, equity prices are up 8 per cent from their trough in November 2013. Though equities typically represent a small portion of average household wealth, a rise in markets is likely to feed through to higher confidence at least”.
Also, it also gave more details about recently witnessed healthy remittance inflows, stating; “On a three-month moving-average (3mma) y/y basis, remittance-inflow growth troughed in March 2013 and has sequentially risen since. Monthly private-remittance inflows reached an all-time high of $ 599 million in November 2013. We expect remittance inflows to continue to be strong in 2014 – rising to $ 7.0 billion (10 per cent of GDP), after $ 6.7 billion in 2013 and $ 6.0 billion in 2012 – given the expected improvement in external growth, a stabilisation in the exchange rate, and the introduction of new web-based money-transferring systems. Anecdotal evidence suggests that remittance inflows are predominantly channelled via rural households for consumption rather than saving; generally speaking, rural households tend to have a higher marginal propensity to consume. This trend should support spending in 2014″.
Meanwhile, the report also revealed that the expected rise in GDP per capita, to $ 4,000 by 2016, should “feed through to structurally higher consumer spending and changing consumer preferences. The organised sector is estimated to represent 3 per cent of the $ 25-30 billion retail market at present; this is likely to change over time as consumers demand more branded goods and services.Consumption of consumer durables is also likely to increase – for instance, the share of households with washing machines, personal computers, and motor cars is still relatively low. In particular, academic research finds that the income elasticity of vehicle ownership increases rapidly between $ 3,000 and $ 10,000 GDP per capita”.
(JH)