Global Courant
New data from the South African Reserve Bank (SARB) shows that household finances are under extreme pressure as stubbornly high inflation erodes consumers’ purchasing power.
Data released this week by the SARB showed that there had been incredibly slow growth in disposable income in the first quarter of the year, with personal disposable income (PDI) growing at a modest 0.2% over that period. grew, up from 0.6% in the fourth quarter of 2022.
While disposable income experienced some growth, the purchasing power of this income growth was offset by high inflation.
According to banking group Nedbank, when disposable income came under pressure during the quarter, consumers turned to credit to make ends meet and cover their expenses.
But this came along with 10 consecutive interest rate hikes, making paying off that debt even more expensive, keeping pressure high.
Vicious circle
Consumer price inflation surprised the upward trend in February and March. As a result, the Reserve Bank continued to raise interest rates aggressively to try to bring inflation back within its target range of between 3% and 6%.
As interest rates hit 8.25%, worsening power outages weighed on consumer confidence, hurting prospects for further employment growth for the rest of the year.
“As a result, households were more careful with their spending. Consumer spending growth slowed to 0.4% in the first quarter from 0.7% in the fourth quarter,” said Nedbank.
Consumer inflation has since fallen – currently at 6.3% in May – but the impact of inflation and resulting interest rate hikes is still filtering through to the economy.
Nedbank said that given the tightness of disposable income, more households were forced to supplement their spending with credit. As a result, consumer credit growth averaged 7.6% year-on-year.
This also led to seasonally adjusted nominal household debt rising faster than income in the first quarter, increasing the household debt-to-income ratio from 61.6% to 62.1%.
The chart below illustrates the rate at which debt-to-income ratios have increased recently:
Not only did the average South African’s debt rate rise, but the cost of servicing debt followed with 475 basis points of interest rate hikes added to monthly bills.
Nedbank said the ratio of the cost of household services to disposable income in the first quarter rose from 7.9% in the fourth quarter to 8.4% – the highest since the second quarter of 2020.
“It is encouraging that household net wealth increased in the fourth quarter, as the value of total assets exceeded that of total liabilities. According to the SARB, asset values were mainly driven by higher stock prices and housing stock.”
“As a result, the ratio of net wealth to nominal disposable income increased from 391% to 397%,” said Nedbank.
The graph below shows the increase in redemption costs:
In addition, households in the country are saving less, with the ratio of household savings to GDP savings falling from 2.0% to 1.8%, while government dissaving increased further from 1.1% to 2.4%.
Nedbank said the ratio of gross national savings to GDP in the first quarter increased from 13.5% in the fourth quarter to 14.5% of GDP. The increase came from corporate savings, which rose from 12.5% to 15%. In contrast, the ratio of household savings to GDP fell from 2.0% to 1.8%.
Expectations
Nedbank said household finances are likely to remain under pressure in the near term; however, declining inflation will begin to ease some pressure on disposable income in the second half of the year.
“However, the benefit of lower inflation is partly mitigated by higher interest rates and government-regulated prices. A significant improvement in household finances will be achieved with higher employment growth.”
“This is unlikely to happen any time soon, given that slow policy reforms and persistent power shortages, among other structural issues, weigh on the private sector’s willingness to increase capacity and accelerate employment,” Nedbank said.
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