Household wealth drop trips up economy
• Expected tax increases will lead to less disposable income and hit other factors needed to raise growth rate
For the past two years, South African households’ real net wealth has been declining. But for once the usual culprit, rising debt, is not to blame. South Africans are deleveraging. The real problem is that households are not doing enough to save and invest.
This means that households may not be saving enough for retirement, or may not have sufficient savings on hand to ride out an emergency. But household wealth accumulation translates into the investment that drives the nation’s growth and job creation.
According to the latest Momentum/Unisa household wealth report, households’ real net wealth (the difference between their combined assets and liabilities) has declined from a recent peak of R7.1-trillion in the second quarter of 2014 to R7.03-trillion in the third quarter of 2016.
More than R70bn has been wiped off South Africans’ combined wealth in this period.
Yet households are decreasing their debt levels. In real terms, aggregate household liabilities have been falling every quarter since the third quarter of 2015 and are now down almost 1% on a year ago, according to the Momentum/Unisa Household Liabilities Index.
The report’s author, Johann van Tonder, an economist in Momentum’s client engagement solutions unit, ascribes the reduction in household debt mainly to a reduction in instalment sales credit, which is normally driven by purchases of durable goods.
According to the Reserve Bank, purchases of durable goods were down almost 8% in the third quarter of 2016 compared to a year before.
New passenger car sales, a great barometer of the health of consumers, fell by 16% over the same period.
The real value of household assets has also continued to fall. This indicator peaked in the first quarter of 2015 at R8.56-trillion and has been falling ever since, according to Momentum/Unisa data. It puts the real value of household assets at R8.4-trillion at the end of the third quarter in 2016, down R15.7bn from the previous quarter.
This decline is due to households making proportionally lower contributions to retirement funds and annuities, and because of a lack of growth on such investments, Van Tonder explains. In the two years up to the third quarter of 2016, the JSE all share index returned a desultory 1.9% growth.
The underlying reason for these negative trends is that the economy simply has not been growing fast enough. Consequently, jobs growth and wage growth have been slowing over the past few years.
What is worse, inflation took off in 2016 on the back of the worst drought in more than 50 years. It resulted in a 75 basis point cumulative hike in interest rates, further reducing real disposable income growth.
“The consumer is under pressure,” says Linette Ellis, consulting economist at the Bureau for Economic Research.
“There has been very little employment growth and the drought has caused high food inflation,” she says.
In the four years to 2015, growth in SA’s real disposable income per capita averaged just 0.8% annually, according to Bank data, compared to 4.7% annually during the boom years from 2004 to 2007. As most people use their income to accumulate assets, this means that if a person is income-poor the chances are good that they are asset-poor as well.
All this has been reflected in a slowdown in consumer spending growth.
In the first three quarters of 2016, it averaged 1% compared to an annual average of 3.5% over the last 10 years.
The bureau expects real consumer-spending growth to recover slightly to 1.4% in 2017 on lower inflation and to claw its way back up to 2.1%-2.5% in the year or two after that. However, it sees little prospect of consumer spending getting back up to 3.5% soon. There are several reasons for this.
Household credit extension has all but dried up. Large clothing and furniture retailers in particular have complained of a double-digit decline in credit sales over the past year.
“In the past, consumers were able to get unsecured loans or buy on credit from retailers when their income was under pressure,” says Ellis. “Now the new credit regulations mean that retailers have to do more stringent financial checks on consumers before extending credit,” she says. Lower-middleclass debt levels are also quite high, she adds, and, given the low-confidence environment, lenders are looking carefully before granting credit.
The government can also no longer be relied on as a strong source of wage and employment creation. It has budgeted for tighter fiscal policy over the medium term to ensure the sustainability of SA’s public finances. Given that public sector wages and social grant expenditure together account for almost 30% of household income, any slowdown in either will be felt in the real economy.
In addition, unemployment is at record highs and is likely to remain so. The Bank expects 2016 to have been the first year since the global financial crisis in which total employment growth contracted. If the economy perks up as expected in 2017, private fixed investment and total employment growth should improve slightly.
Asset prices should also rise in response to better growth which would also help lift consumer spending. “But we’re talking about a slight uptick from a very low base,” Ellis cautions.
Hefty tax increases are also on the cards. The Treasury is looking for R28bn in additional tax revenue in the coming fiscal year, and a further R15bn in 2018-19. This will require more than routine tax increases, according to Sanlam economic adviser Jac Laubscher.
A one percentage point increase in the VAT rate would generate about R22bn in additional tax revenue in the first year, he estimates, but this will be politically unpalatable as the tax is seen as regressive.
“Without an increase in the VAT rate, increases in income and wealth-related taxes, including adjustments to marginal rates of personal income tax, will be unavoidable,” says Laubscher.
He estimates that if the bulk of the additional revenue is to come from personal income taxes, an increase of at least two percentage points to marginal tax rates is likely.
Higher income and wealth-related taxes will, however, translate into less disposable income and lower household savings and wealth accumulation — the opposite of what is needed to raise the growth rate.
Economists estimate that a 1% change in real household wealth contributes to a 0.6% change in real GDP.
“Household wealth accumulation must occur much faster for the economy to grow faster,” explains Van Tonder.
“We need less taxes on households, more formal savings by households, more jobs growth and affordable borrowing,” he says.
With none of this likely to happen in the short term, the likely result is that the real value of household net wealth will not grow sustainably or continue to decline. Arresting and reversing this trend over the coming years will be as important in improving the financial wellness of households as it will be in restoring the country’s longterm growth potential.
REDUCTION IN HOUSEHOLD DEBT ASCRIBED MAINLY TO A REDUCTION IN INSTALMENT SALES CREDIT WITHOUT INCREASE IN VAT, INCREASES IN INCOME AND WEALTH-RELATED TAXES WILL BE UNAVOIDABLE