Good news for South African households

While South African households are under severe financial pressure, there are some positive signs, and this situation should improve by year-end.

Investec chief economist Annabel Bishop said South African households are facing severe financial strain.

One sign of this strain is negative household savings. In South Africa, household savings were -1.1% of disposable net income.

Bishop said that, with this ratio in negative territory over the whole of 2023, household financial vulnerability has increased over the past year.

In addition, real remuneration for South African workers fell in 2023 and 2022, contributing to consumer weakness and lowering economic growth, along with the high prevailing inflation rate of the past two years.

Bishop added that rand weakness over the past two years has been a key contributor to higher inflation. This, in combination with a marked rise of over R5/litre in petrol prices in South Africa and food price inflation climbing over 2022 and into 2023, shot inflation up.

Higher interest rates over these years have also weighed on consumers and added to debt service costs, which escalated to 9% of disposable income in 2023. This led to higher consumer stress and increased risk of arrears and defaults.

Debt pressure has also increased, as household debt to disposable net income increased to over 62% last year.

In addition, direct and indirect taxation on households has remained a significant drag on consumption, with the tax elasticity showing minimal room for further increases without weakening economic growth materially. 

Positive signs

However, Bishop said positive signs are emerging that this pressure may be lifted by the end of 2024.

For example, average take-home pay lifted for the first month of the second quarter of 2024 by 5.6% year on year, up from March’s 5.0%.

This is also above the CPI inflation rate of 5.3%, raising real inflation-adjusted incomes by 0.2%. 

In other words, in real terms, take-home pay rose by 0.2% in April. 

“While a small increase on its own, real take-home pay rose by 3.5% in January, with inflation a key factor to these real salary and wage outcomes,” Bishop explained.

CPI inflation is also expected to fall over the remainder of the year, projected to reach 4.2% by December, This will allow for an improvement in real incomes, while spending is also boosted by the relaxation of retirement fund rules.

The release of retirement savings under the two-pot retirement reform around the turn of the year will support Household Consumption Expenditure growth in Q4 2024 and Q1 2025.

Bishop said this would add to consumer income in periods of about R40 billion if fully utilised and taxed in the same way.

In addition, a strengthening economy this year, as load-shedding proves substantially lower than in 2023, would support business activity, along with lessening the freight crisis, aiding firms’ wage affordability.  

The international oil price has also dropped substantially this month, which currently means that if the trend continues, the petrol price will likely drop by R1.65/litre next month.  

Oil prices are in US dollars, and the fall in the price of the dollar-based international commodity has made it cheaper to import, even with the sharp rand depreciation this month. 

“Also positive for consumers, we continue to believe there is the possibility of an interest rate cut in November, should inflation moderate significantly, with food price inflation and fuel prices not seeing further marked increases,” Bishop said.