Higher interest rates continue to squeeze the finances of most households in the run up to Black Friday, a key event in the annual retail calendar, marked by retailers offering massive discounts, according to the latest Altron FinTech Household Resilience Index (AFHRI) issued earlier this week.
The index showed that 11 of the 20 constituent indicators of the AFHRI had declined year-on-year and nine had declined since the last comparable quarter before the pandemic.
Johan Gellatly, managing director of Altron FinTech, said these results did not bode well for consumers to spend excessively in the run up to Black Friday.
"Christmas may also be bleak for retailers across the board, with households now very clearly under severe strain, especially those in the lower income brackets,“ Gellatly said.
He said the AFHRI was invaluable in this respect, providing benchmarking information on key market trends so as to assist their clients to continue trading in challenging times by making sure their solutions were both effective and fit-for-purpose.
Dr Roelof Botha, an economist who compiles the index on behalf of Altron FinTech, said ever since the onset of restrictive monetary policy in South Africa, the financial resilience of households had been under pressure, with a strong-and predictable-inverse correlation between higher interest rates and the AFHRI trend.
“The gains made in the post-Covid-19 recovery period have now been wiped out by the highest interest rates in 15 years, with the current real prime overdraft rate, i.e, prime minus the consumer price index (CPI), at a level of 7%, more than double the average rate that existed during the tenure of the previous Governor of the South African Reserve Bank (SARB), Gill Marcus,” Botha said.
According to the index, the SARB’s decision to raise interest rates to higher levels than before the pandemic continued to be a thorn in the flesh of most households and businesses, as this overly hawkish policy approach was not based on any signs of demand inflation in the economy.
During last year and the beginning of this year, the lingering effects of higher fuel prices, record increases in global freight shipping charges, and an unusually strong US dollar, were primarily responsible for higher inflation all over the world, including South Africa.
In the second quarter of this year, the AFHRI recorded a value of 109, a marginal increase compared to the level of 108.6 during the first quarter of the year. No change was recorded year-on-year. With a base level of 100 for the inception period of the index (Q1 2014), this meant that the average household’s financial disposition has improved by only 9% in real terms over a period of more than nine years.
Botha said that since 2014, the average annual improvement in the index was less than 1%, which served as a clear indication of the economy’s under-performance, mainly because of low investor and business confidence resulting from state capture and the erosion of the efficiency of infrastructure.
"Over the past 18 months, this has been exacerbated by the negative effects of a sharp increase in the cost of credit,” Botha said.
According to Botha, scrutiny of key constituent indicators of the AFHRI and the reasons for the overall downward trend reveal the following the refusal of the Monetary Policy Committee (MPC) of the SARB to adopt an accommodating monetary policy stance, even though inflation, as measured by the CPI and the producer price index (PPI) peaked more than a year ago, should cause concern at National Treasury and the South African Revenue Services, as subdued household expenditure was threatening the country’s fiscal stability.
He said that despite inflation having moved to a comfortable level of close to the mid-point of the SARB’s target range of 3% to 6%, the MPC’s insistence on maintaining a real prime rate of 7% defied logic, as this rate was now 126% higher than the average real prime rate that existed in 2014.
The economist said unnecessarily high interest rates had a profound negative impact on the ability of households to maintain their standard of living and on the ability of businesses to invest in new productive capacity.
The AFHRI also concluded that the downward trend in the financial resilience of households would have been more pronounced in the absence of a welcome further increase in employment in both the private and public sectors, which represented one of the bright spots in the second quarter reading of the AFHRI.
It said that unfortunately, the momentum diminished this year, with 412 000 new jobs in the first half of the year, compared to more than a million in the first half of last year.
The positive employment effect was not matched by total remuneration levels in the private sector, which weighed on the AFHRI given the declining year-on-year trend and high weighting amongst the composite indicators of the Index, it said.
BUSINESS REPORT