Mariam Isa
5 September 2008
Johannesburg — HOUSEHOLD debt fell for the first time in nearly five years, while the broadest measure of domestic consumption shrank at its fastest pace since 1999 in the second quarter of this year, the Reserve Bank said yesterday.
Growth in consumer spending, the economy's main engine, slowed sharply in that period, backing evidence of the mounting toll taken by higher interest rates, its September quarterly bulletin showed.
"Consumption responded to rising interest rates and the cost of servicing household debt," the Bank said. "In the second quarter a reduction in the ratio of household debt was registered, signalling the end of a four-year upswing."
Household debt sank to 76,7% of disposable income from a record of 78,2% in the first quarter, after clocking up successive peaks over the past few years. But debt costs still edged up to 11,6% of disposable income from 11,3% -- levels last seen in 1999 -- reflecting the Bank's decision to raise interest rates by half a percentage point in both April and June.
"Clearly consumers have become more cautious, responding to the combination of higher interest rates, high debt levels, and slowing real income growth," Stanlib economist Kevin Lings said.
Consumer spending grew a mere 1,2% in the second quarter after growing 3,3% in the first quarter, extending a slowdown that began early last year .
Growth in disposable income slowed to 2 % in the second quarter from 2,6% in the first quarter -- far below the peak of 9 % in the last quarter of 2006.
Analysts said this reflected the fact that pay increases were not keeping up with inflation, and should back the case for the Bank to hold interest rates steady for the rest of this year.
"The slowdown in consumer spending ... combined with the latest inflation data ... should convince the monetary policy committee to keep rates on hold for the remainder of the year," Nedbank said in a research note.
The Bank has raised its key repo rate by five percentage points to 12% between June 2006 and June this year, gradually curbing economic growth.
Inflation measured by the annual rise in CPIX, which excludes mortgage costs, rose by a record 13% in July, and is set to climb more this year as electricity tariff hikes feed into prices.
But monetary policy acts with a time lag of up to two years, and given that inflation is expected to subside next year, markets are pricing in a series of rate cuts starting in April.
The Bank's bulletin showed that growth in the main measure of investment -- gross fixed capital formation -- slowed to 9,1% from 16,9% in the first quarter of this year.
This is worrying as it was the first single-digit rise in the indicator for three years -- and investment is supposed to replace consumer demand as the economy's growth engine.
Adding to the raft of sluggish figures, the economy's main measure of domestic consumption, gross domestic expenditure, contracted 4,2% in the second quarter. That was the first fall in seven years, and the biggest since early in 1999.
"The speed and extent of the fall are remarkable ... this is not an environment in which we are likely to see any further tightening (of interest rates)," Standard Chartered's research head for Africa, Razia Khan, said.
"A key pillar of the economy, investment, appears now not to be providing the support to growth that it once did."
But investment as a ratio of gross domestic product still rose to 22% from 21% in the first quarter of the year, nearing an official goal of 25%. That is seen as a prerequisite for boosting the economy's sustainable growth rate to 6% from 4,5%.
In the past four years, the economy has expanded by an average annual rate of more than 5%, but the pace is set to slow sharply this year and next.
Analysts predict growth will fall to nearly 3% in both years, curbed also by a slowing global economy, which is set to push some countries into recession.
The treasury has not revised its official forecasts of about 4% growth for both years, but changes will be unveiled in its medium-term budget policy statement next month.
Bank data showed household spending on durable goods contracted by a steep 14,9% in the second quarter , from 8,1% in the first.
Spending on semi- durable goods slowed to 2,4% from 10,5%, adding to evidence of the pain which retailers are feeling.
Retail sales, the economy's third biggest sector, declined 2,2% in the second quarter , according to official data. If the trend continues, as many analysts suspect, the sector will -- technically at least -- have slid into recession.
Both company failures and personal bankruptcies have rocketed this year, and no let-up is expected .
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