Household spending won’t boost growth
ONE reason South Africa’s economy is likely to register exceptionally weak growth this year and next is due to an expectation of continued weakness in domestic expenditure growth. This will be influenced by higher interest rates, government belt-tightening, muted employment growth, low consumer confidence and low growth in credit uptake.
Lending to the private sector is evolving as expected. In April this year, growth in credit extension slowed to 7.1%, pulled down by credit extended to households, which grew only 2.3%.
The weakness in April’s household credit uptake is due to very weak growth in unsecured lending to households. General loans, which include unsecured personal loans, registered a deep contraction.
The latest information suggests that growth in unsecured lending to households over the past two years may have been lower than previously stated because the Reserve Bank had held the old African Bank data constant between July 2014 and April this year. This is bad news for overall economic growth but good news for the continued rehabilitation of the household balance sheet.
South Africa’s household debt relative to income declined from just under 90% in early 2008 to 78% at the end of last year.
Furthermore, the household debt burden relative to income compares favourably with many developed economies such as Canada, the US and several members of the eurozone, where total household debt is greater than household disposable income.
However, despite the gradual reduction in the household debt burden, prudently tight credit-granting criteria remain appropriate. This is because there are key economic risks confronting South African households compared to those in more developed economies.
First, unemployment in advanced economies such as the US and Europe has decreased dramatically since the financial crisis. US unemployment is steady at 5%, half what it was in 2009. The eurozone jobless rate is a little over 10% but is moving in the right direction.
In contrast, data released by Stats SA last month show that our unemployment rate increased to an unacceptably high 26.7% in the first quarter. It is now higher than it was at the peak of the 2008-09 recession.
With the South African economy expected to grow between 0.5% and 1.5% over the next two years, employment and real income growth will be muted.
Second, inflation in South Africa is fast eroding disposable income. In North America and the eurozone, inflation remains well below the target levels of their respective central banks, allowing interest rates to remain at record lows.
Domestically, persistent inflation breaches have forced the Reserve Bank to raise interest rates by a cumulative 125 basis points in less than six months and by 200 basis points since December 2013, thereby raising the debt service cost to about 10% of disposable income.
While the Reserve Bank paused last month, it is by no means certain that rates will not be hiked further. Apart from the dangers posed by stubbornly high inflation and the increasing likelihood of a US interest rate increase, a sovereign credit rating downgrade would raise the cost of borrowing and reduce the ability of households to repay debt.
Finally, South Africa’s household savings rate is extremely low. When measured as a percentage of disposable income, it has not been positive since 2005. Over the past 10 years, households have tended to consume most of their income. The negligible savings rate means there are limited buffers to fall back on as inflation, rising interest rates or job losses erode disposable income.
Household spending makes up more than 60% of spending in GDP. A significant proportion of that consumption is supported by credit.
In the absence of job creation and sustainable increases in disposable income, slower credit growth will curtail the household debt burden, but at the expense of short-term economic growth.