Low economic growth keeps consumers cautious

Even as economic growth picked up in the second quarter – to 0.8% versus 0.1% in the first three months of the year – economists warn that the environment for the consumer remains subdued.

Against a backdrop of low economic growth, with full-year estimates hovering at around the 1% mark, South Africa’s unemployment rate is officially 33%, inflation is at 3.5% and expected to rise to around 4% by year-end, and interest rates are still relatively high at 10.5% compared with 7% in the middle of 2020 when they were cut to stimulate growth.

Economists are divided on the outlook for consumers, with Old Mutual chief economist Johann Els taking a more positive stance. He says low inflation and lower interest rates are supporting real household income and borrowing affordability.

“The economy is still expanding, albeit at a subdued pace, and several local and global factors should provide a measure of resilience,” Els tells Personal Finance.

Yet, the Altron FinTech Household Resilience Index for the first quarter, released last week, showed that the real prime rate – prime minus inflation – is still 118% higher than in early 2020 and 177% higher than in 2014, underscoring that the cost of borrowing remains elevated.

Anchor economist Casey Sprake says the stronger-than-expected rebound brought some relief after a sluggish start to the year but adds it did not alter the picture of an economy still struggling to build momentum.

The gross domestic product data, released by Statistics South Africa on Tuesday, showed household spending picked up in the second quarter. Els says this points to consumers responding to an improved purchasing power environment.

Consumers have benefitted from a low inflationary environment and monetary easing, with a further interest rate cut announced in July, notes Lara Hodes, Investec economist, when commenting on consumers’ purchasing power.

Sprake argues that household consumption may have held up, but this has largely been through spending shifts and greater reliance on categories like insurance and discretionary services, rather than a surge in incomes.

“Employment creation remains weak, wages are under pressure, and the cost of living continues to bite – with tariffs, administered prices and food inflation set to weigh further on household budgets in the coming months,” she says.

The Competition Commission’s August Cost of Living Report, its latest, says there is a cost-of-living crisis that “highlights the deeply entrenched economic and social challenges faced by the country, particularly in the context of widespread poverty and heightened vulnerability to global economic volatility”.

The Commission also notes that rising inflation, especially for essentials such as food, fuel and electricity, is putting households under unprecedented strain. Botha explains that almost 10% of the inflation basket consists of administered prices such as electricity, water and fuel.

“These price surges have significantly reduced purchasing power, increased the risk of food insecurity and forced families, especially those in lower-income brackets, to make increasingly difficult financial decisions, often compromising on basic needs,” the report says.

The report also states that the ongoing energy crisis has driven electricity tariffs higher, with a “disproportionate impact on lower-income households that already spend a substantial portion of their earnings on necessities”.

Between 2020 and 2025, electricity prices increased by 68% and water prices went up by 50% which is a much higher rate than general inflation which increased by 28%, the Commission found.

Els sees a positive in that nominal incomes – which strip out the effects of inflation – are rising faster than inflation.

The BankservAfrica Take-home Pay Index found that salaries in July were 1.1% lower than in June and 6.9% below February levels. A comparison between average headline inflation and the nominal average increase in the Index since 2017 suggests that salaries have recovered, but not fully after the weak years between 2021 and 2023.

BankservAfrica anticipates that average nominal take-home pay for 2025 will most probably still be above 2024.

Its findings are based on take-home pay for about a third of employed South Africans. Weekly-pay data is adjusted to monthly rates, and social security payments (around 3.8 million payments of about R1 000) are excluded from the dataset.

This comes even as the Competition Commission’s report notes that wages have not kept pace with rising costs and warns that “the strain on household budgets is a real concern”.

Sprake says early third-quarter indicators point to a fragile recovery at best. Citadel chief economist Maarten Ackerman observes that the figures suggest the economy is showing resilience in the face of challenges but emphasises that South Africa remains in a per capita recession.

The second-quarter figures are for a period that predates the implementation of trade tariffs with the US, says Sprake. “The timing matters: while the second-quarter figures offer a snapshot of an economy finding its feet, the impact of higher trade barriers, particularly on the automotive sector and related manufacturing industries, is only beginning to filter through,” she says.

However, Els anticipates that several sectors, including government and personal services, returning to growth “could help offset tariff-related job losses linked to weaker trade with the United States”.

Low business confidence is consistent with an economy “muddling through” at around 1% growth, far below what is needed to generate meaningful job creation or income growth, Sparke says.

Independent economist Dr Roelof Botha said: “We need to get people to spend more money. To do that, we need lower interest rates, we need more employment.”

“For the average South African, the implications are sobering,” says Sprake.

PERSONAL FINANCE