Household finances weakened by lockdown restrictions: SARB QB

By Nedbank Group Economic Unit

The South African Reserve Bank’s Quarterly Bulletin (QB) was released earlier today.

According to the Quarterly Bulletin, economic activity normalised on easier lockdown restrictions in the fourth quarter of 2020, supporting growth of 3.7% q-oq in personal disposable income (PDI). However, household finances were hurt by reduced working hours, lower pay andjob losses. PDI was 4.8% lower in the fourth quarter compared with the same period in 2019, which clearly shows the effect of the lockdowns on consumer incomes.

Household consumption spending remained firm in the fourth quarter, but the growth rate decelerated to 7.5% q-o-q from a 75.3% surge in the third quarter, with spending growth in all the categories of goods moderating off a high base.

Household debt rose in line with spending, driven by lower interest rates, attractive offers by retailers and the usual seasonal rise in spending during the festive season. Consequently, the ratio of debt to disposable income rose to 75.3% from 74.9% in the third quarter. However, the ratio of debt service cost to disposable income decreased slightly to 7.7%, the lowest since the first quarter of 2006, from 7.8% in the third quarter.

In 2020 as a whole, growth in household debt slowed to 4% from 5.8% in the previous year. However, as a percentage of disposable income, it increased to 77.1% from 72.9% as household income declined, devasted by the Covid-19 pandemic and subsequent lockdown restrictions, resulting in profit losses and rising unemployment. The Reserve Bank cut interest rates by 300 basis points in 2020, which reduced household debt servicing cost to a historic low of 8.5% in 2020 from 9.4% in 2019.

The national savings rate declined to 14.4% of GDP in the fourth quarter from 16.4% in the third, mainly due to sharply higher government dissaving, which outweighed lower households and corporate savings. For the year as a whole, however, the national savings rate was steady at 14.6%.

Households’ net wealth rose further to 371.2% of disposable income in the fourth quarter from 364.4%, with asset growth outpacing liabilities. Assets were propped up by the strong rebound in equity prices and some improvement in house prices.

However, net wealth deteriorated in calendar 2020 as the value of household assets decreased somewhat while that of liabilities increased slightly. Despite this, the ratio of household net wealth to nominal disposable income increased to 369.4% in 2020 from 362.4% in the previous year, as job loss affected household income more than wealth.

Economic activity will fare better in 2021 as the gradual rollout of Covid-19 vaccines ease anxiety. However, household finances will probably remain under pressure. Companies will still be hesitant to expand operations due to the financial damage caused by the lockdowns, excess capacity and structural constraints, particularly unreliable power supply. This will contain job creation and therefore limit income growth. Any resurgence in infection rates would probably result in stricter lockdown measures, potentially derailing the expected recovery.