Latest statistics show how tighter monetary policy takes effect

The latest statistics show how tighter monetary policy takes effect and how much consumers battle to make ends meet, with household finances remaining weak amid slower income growth and elevated inflation. The most and least affluent South Africans are hit the hardest, while debt balances increased amid economic headwinds.

Statistics from the South African Reserve Bank (Sarb) June Quarterly Report shows that household finances remained under pressure as personal disposable income grew by a modest 0.2%, down from 0.6% in the fourth quarter of last year.

ALSO READ: Food basket price LATEST: Cost down, but not enough…

A seasonal rise in employment supported the modest increase, with a total of 258 000 jobs created over the period. However, consumers’ purchasing power was hurt by elevated inflation, with CPI surprisingly moving to the upside in February and March, the Nedbank Group Economic Unit says.

“The higher inflation and other upside factors persuaded the Sarb to continue tightening monetary policy and raising interest rates aggressively. At the same time, worsening electricity outages weighed down consumer confidence affecting prospects of further employment growth for the rest of the year. Consequently, households were more cautious of spending, with growth in consumer spending slowing to 0.4% in the first quarter from 0.7% in the fourth.” 

Consumer credit growth

The unit also says the squeeze on disposable income forced households to supplement spending with credit, resulting in consumer credit growth averaging 7.6% compared to last year. Subsequently, seasonally adjusted nominal household debt rose faster than income in the first quarter, pushing the household debt to income ratio up to 62.1% from 61.6%.

Debt service costs also continued to the increase as the Sarb increased interest rates further. The ratio of household debt service cost to disposable income increased to 8.4% in the first quarter, the highest since the second quarter of 2020, from 7.9% in the fourth quarter.

“Encouragingly, households’ net wealth increased in the fourth quarter as the value of total assets outweighed that of total liabilities. According to the Sarb, the value of assets was lifted mainly by higher share prices and housing stocks. Consequently, the ratio of net wealth to nominal disposable income rose to 397% from 391%.” 

The ratio of gross national savings to GDP also increased in the first quarter, rising to 14.5% of GDP from 13.5% in the fourth quarter. The unit says the lift came from corporate savings, which increased to 15% from 12.5%. “In contrast, the ratio of household savings to GDP fell to 1.8% from 2.0%, while dissaving by government increased further to 2.4% from 1.1%.”

ALSO READ: Consumer confidence at second lowest point since 1994

Economic research group, Oxford Economics Africa, says private sector credit demand is moderating as the effects of tighter monetary policy start to bite and expects this trend to continue.

“Businesses and consumers alike are concerned about South Africa’s weak economic growth outlook, while the energy crisis is a major growth constraint and high living costs squeeze household pockets.”

Growth in credit totals barely beat headline inflation which stood at 6.3% in May, the group says. “A diminished outlook for the domestic economy is expected to weigh on private sector credit demand this year.

“Household appetite for unsecured credit, which has been fanned by surging living costs, is unlikely to dissipate, but changes in credit and financial conditions mean banks are adopting a more conservative approach to lending.”

Drop in consumer confidence

The group says meanwhile, survey data for the second quarter shows that South African consumer confidence dropped to the second-lowest reading since 1994. “The majority of consumers expect a weaker national economic performance over the next 12 months and they think it is a bad time to buy durable goods, while the outlook for their household finances has taken a further knock.”

It is significant that high-income households are the most pessimistic, with rand volatility and higher interest rates weighing on their financial positions, including financial security, while lower-income households are arguably the worst off in the current high-cost environment.

“Financial conditions are tight and the Sarb has tightened monetary policy and hiked interest rates in ten consecutive meetings so far, adding a cumulative 475 basis points during the current cycle which started back in November 2021. We forecast that the central bank’s monetary policy committee (MPC) will vote in favour of a 25 basis points increase during its upcoming July meeting, pushing the repo rate up to 8.5%.”

And with the power crisis top of mind for most South Africans, persistent load shedding is likely to drive credit demand, as increased private sector investment in electricity generation is bound to continue for the foreseeable future, the group says.

“That said, little to no near-term growth, mounting downside risks and policy inaction weigh on business confidence, undermining corporate credit demand. Load shedding, logistic infrastructure constraints and high interest rates, together with the impact of being grey-listed, make for a more onerous business environment and increase the cost of doing business.”