Good news about South African salaries
Lower inflation in the third quarter of this year pushed up South Africans’ take-home pay, which is good news for struggling consumers and the country’s GDP growth.
Investec’s chief economist, Annabel Bishop, said positive data have come out so far for the third quarter of this year, supporting expected economic growth.
This positive data includes a marked rise in incomes in real terms. The first two months of the third quarter saw real take-home pay jump 5.5% compared to the same period in Q2 2024.
Bishop explained that the second quarter of this year saw a contraction of 2.4% for the two-month period, creating a statistical base effect that boosted the outcome.
Without this base effect, real incomes would have risen only 2.6% in the first two months of the third quarter compared to the previous two-month period.
Bishop said the rise in real incomes has also been significantly driven by the sharp drop in CPI inflation in July and August to around 4.5%.
She explained how falling inflation has boosted real incomes, which, in turn, will contribute to growth in real household consumption expenditure (HCE) and, therefore, GDP growth. HCE currently accounts for around two-thirds of South Africa’s GDP.
Salary and wage increases have largely exceeded inflation this year after the past few years of contracting real incomes, which weakened real HCE and, thus, real GDP growth.
Another factor that will impact HCE in South Africa is implementing the new two-pot retirement system on 1 September.
This new system allows retirement fund members to withdraw a portion of their savings every year.
In short, the two-pot system will split all future contributions to retirement or pension funds into two ‘pots’.
Two-thirds of every contribution goes into the retirement ‘pot’, and the assets in this component cannot be accessed before retirement.
At maturity, these must be used to purchase a retirement income product, such as a living annuity or guaranteed life annuity.
One-third of every contribution goes into the savings ‘pot’, from which one pre-retirement withdrawal of R2,000 or more can be made per tax year.
Since the system was implemented at the start of September, thousands of South Africans have opted to withdraw from their savings component.
Over R20 billion has already been paid to those who have successfully applied to withdraw from their pension savings in the third quarter, and further withdrawals are expected in the fourth quarter.
SARS recently announced that it has recorded 1.21 million applications for tax directives for withdrawals from the two-pot system’s Savings Withdrawal Benefit and approved 1.15 million tax directives for funds to be released.
The taxman said a total gross lump sum of R21.4 billion has been paid out to date.
While these withdrawals are expected to boost HCE and, consequently, GDP growth, the true effect is yet to be seen.
Bishop explained that withdrawals under the two-pot retirement system are in nominal terms and the hefty number of withdrawals seen since the system’s implementation will need to be adjusted for several factors before the effect on real GDP can be estimated.
Therefore, both headline GDP and HCE readings are in real terms, meaning that the impact of the two-pot retirement system withdrawals will be smaller than the actual amounts withdrawn, as they must be adjusted down for inflation.
In addition, the taxation of withdrawals also needs to be considered. Tax is imposed on a withdrawal at a marginal tax rate ranging between 18% and 45%, depending on their scales.
However, Bishop noted that consumers using these withdrawals to pay off some of their debt could significantly reduce their debt load, which will be very positive for consumers and the economy.
This is because, currently, consumers are spending a significant portion of their take-home pay on paying off debt. Having this debt paid off or at least minimised will allow for greater consumer spending, which will boost the economy.
Comments