Household finances in South Africa are expected to deteriorate as pressure from rising interest rates and elevated inflation could shrink personal disposable income, after real consumption expenditure rose modestly in the last three months of 2022.
Data from the South African Reserve Bank (SARB) on Friday showed that real final consumption expenditure by households reverted to an increase in the fourth quarter of 2022, following a small decrease in the third quarter.
According to the SARB’s Quarterly Bulletin, household consumption expenditure grew by a subdued rate of 0.9% quarter-on-quarter, and 1.9% year-on-year, in the fourth quarter.
Consumption was partly lifted by higher tourist arrivals during the festive season and Black Friday sales.
Real personal disposable income also grew by a seasonally adjusted 0.8% quarter-on-quarter, following a 0.3% contraction in the third quarter, reflecting the continued recovery in employment.
The SARB said the increase in household consumption expenditure in the fourth quarter of 2022 was consistent with the increases in real disposable income and credit extension.
It said this resulted largely from faster growth in real spending on durable goods and services.
“Purchases of furniture and household appliances, recreational and entertainment goods as well as computers and related equipment increased, while growth in consumer spending on personal transport equipment slowed,” the bank said in the Bulletin.
“Real spending by households on semi-durable goods remained broadly unchanged for a second successive quarter, while purchases of non-durable goods decreased slightly further in the fourth quarter of 2022, largely due to lower spending on food, beverages and tobacco as well as medical and pharmaceutical products.”
However, these small gains in household consumption and disposable income could be dealt a blow as the SARB on Thursday hiked interest rates by a more-than-expected 50 basis points to 7.75% in order to deal with high inflation.
Headline consumer price inflation remained stubborn and rose to 7.0% in February, from 6.9% in January, remaining above the SARB’s 3-6% target range, driven by food prices.
Consumer food price inflation has accelerated briskly over the past year, to 14.0% in February, despite the marked moderation in global food price inflation in recent months.
Core inflation has been accelerating steadily since early 2021 and breached the midpoint of the inflation target range from September 2022, reflecting a broadening in domestic price pressures.
Nedbank economist Johannes Khosa said household finances would probably remain weak in 2023.
Khosa said elevated inflation had eroded consumer purchasing power and compelled households to be more cautious of spending.
“While the slow recovery in employment and higher nominal wages will offer some support, the potentially slower rate of decline in inflation will continue to erode real disposable income, particularly in the first half of the year,” Khosa said.
“After that, inflation is forecast to recede substantially, which could help lift confidence and boost the purchasing power of household incomes.
“However, the benefit of lower inflation will partly be offset by higher interest rates. These headwinds, combined with continued load shedding, are expected to hurt consumer confidence and spending in 2023.”
For the year as a whole in 2022, household consumption expenditure rose by a modest 2.6%, this compared to 5.6% in 2021, after lifting from -0.3% in the third quarter to 0.9% in the fourth quarter.
Investec economist Lara Hodes said growth in household consumption expenditure, which comprises around 60% of gross domesticated arena, was likely to be modest in the medium term.
Hodes said heightened inflation with the latest consumer price index reading ticking up to 7.0%, coupled with elevated interest rates continue to constrain balance sheets.
“Moreover, consumer confidence remains subdued, it plunged further into contractionary territory in the first quarter of 2023, as the myriad of domestic challenges, most notably the critical electricity supply predicament continues to weigh on sentiment and the country’s economic growth prospects,” Hodes said.
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