South African consumers are facing a bleak and uncertain period in the months ahead before the year ends as household finances remained under pressure in the second quarter on elevated prices and rising interest rates.
The SA Reserve Bank (SARB) said on Tuesday that household finances deteriorated slightly in the second quarter, hurt by higher inflation, rising debt service costs and lower household net wealth.
In its Quarterly Bulletin, the SARB said household consumption expenditure (HCE) slowed to 0.6% quarter-on-quarter from 1.2%, weighed on by softer income growth as higher inflation eroded the growth in real personal disposable income.
Inflation rose above its target range of 3%-6% in the second quarter mainly due to Russia’s war in Ukraine, forcing the central bank to adopt an aggressive monetary policy and hike interest rates.
As a result, household debt increased, probably reflecting pre-emptive purchases of assets ahead of aggressive interest rate increases.
“The debt burden of households rose further in the second quarter of 2022 as their exposure to most categories of credit increased,” read the Quarterly Bulletin.
“Households’ net wealth declined in the second quarter of 2022 as total assets decreased while total liabilities increased.”
Households’ net wealth declined in the second quarter due to lower total assets, reflecting the slower growth in house prices and the carnage in the equity markets, while household liabilities increased.
Nedbank economist Johannes Khosa said household finances would remain under pressure in the short term as the purchasing power of income would be eroded by higher inflation and administered prices.
Khosa said that debt service costs would increase as the central bank continues to hike interest rates to tame inflation following its 75 basis points hike this month, raising rates from 5.5% to 6.25% per annum.
“Some of the pressure on income will start to ease as inflation starts to moderate in the coming months. A significant improvement in household finances will be achieved with faster employment and income growth,” he said.
“This is unlikely to be experienced in the short term, given the depressed business confidence, which is weighed by extensive power shortages and slow policy reforms, among other structural issues.”
Real economic activity in South Africa contracted by 0.7% in the second quarter following two successive quarters of expansion, leaving the level of real GDP 0.3% lower than the average level in 2019 before the onset of the Covid-19 pandemic.
Investec chief economist Annabel Bishop said the outlook had darkened as uncertainty had risen over the onset of a global recession.
Bishop said rising uncertainty was reflected in weakening sentiment indicators for key economies, as well as the recent bear market activity and ongoing downwards revisions to economic forecasts, while recession risk had climbed for some key economies
“With the EU seen at risk of recession in the second half of 2022 already, the outlook for South Africa’s economy has worsened, with export growth expected to be substantially weaker in the second half than in the first half of 2022, and the next 12 months at higher risk of recession,” she said.
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