South African households increasingly less well off – Reserve Bank

South African households are increasingly less well off, with their finances and net wealth deteriorating, debt becoming more expensive and no expectation that their financial woes will end soon.

According to the South African Reserve Bank’s (Sarb) Full Quarterly Bulletin for the third quarter, household incomes contracted for the third consecutive quarter, with real personal disposable income declining by 0.3% compared to the second quarter, after shrinking by the same margin in the second quarter.

Personal disposable income declined by a relatively sharp 2.9% so far this year, while inflation continued to outpace wage and salary increases and eroding real incomes, Nedbank economists Johannes Khosa and Nicky Weimar, say.

What made in even worse for households was that the cost of servicing their debt increased further at the same time, consuming 8.9% of their disposable income, up from 8.8% in the second quarter which primarily reflected the impact of sharply higher interest rates.

However, household indebtedness eased slightly as nominal income increased by more than household debt, resulting in the ratio of household debt to disposable income moderating to 61.9% from 62.5%.

“Against this challenging background, household dissaving continued, with the ratio of personal savings to disposable income standing at -0.7% in the third quarter, slightly less severe than the -0.8% of the second quarter,” Weimar says.

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Shrinking incomes and higher interest rates

Khosa points out that shrinking incomes and higher interest rates contributed to the 0.3% quarter-on-quarter contraction in household consumption expenditure.

Households’ net wealth also declined in the third quarter as the value of total assets declined while the value of liabilities increased. Weimar says falling equity prices mainly contributed to the drop in total assets, offsetting higher property values. “Consequently, the ratio of net wealth to nominal disposable income fell to 382% from 392%.”

The ratio of gross national savings to gross domestic product (GDP) was steady at 14.8% in the third quarter due to savers’ mixed performances. Corporate savings remained robust, rising to 17.3% from 17% as companies remained cautious of increasing capital spending. However, household savings slowed for the third consecutive quarter to 1.7% from 1.8%, hampered by the higher cost of living.

Khosa points out that these were outweighed by government’s continued dissaving, which deepened to -4.6% from -4.3%, reflecting the impact of higher-than expected spending needs and poor revenue collection.

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What to expect going forward?

Weimar says household finances will remain tight in the final quarter of this year and early next year, weighed down by sticky inflation, high interest rates and tighter lending standards due rising non-performing loans.

“Some improvement is expected during the second half of the year as inflation recedes towards the Sarb’s target range and convinces the Monetary Policy Committee (MPC) to start cutting interest rates.”

According to Khosa, a sustainable improvement in household finance will be achieved through faster employment creation, which can be achieved through robust economic growth. “Much of the employment growth experienced recently was driven by normalisation in underlying economic activity in industries heavily affected by the restrictions imposed during the pandemic and government spending.”

However, he points out, the obstacles to sustainable economic growth unfortunately remain considerable, including vulnerable power supply and mounting transport bottlenecks, compounded by the slow pace of structural reforms.

“Meanwhile, government plans expenditure cuts, which include more subdued capital spending and restrictions on new hires to improve public finances. Against this challenging backdrop, household finances will remain under pressure in the short term.”