South Africa’s economy, like many other economies globally, has had a bumpy start to 2022, notes Chris Blair, CEO at remuneration firm 21st Century.<\/p>\n
The Ukraine-Russian war, volatility in international financial markets, inflationary pressures, etc. have caused an economic environment that threatens to spill over into a global recession.<\/p>\n
Locally, the economy is currently characterized by low levels of economic growth, high levels of unemployment (above 35%), inflation rates above the upper limit of the SA Reserve Bank\u2019s inflation target (above 6%) and a cycle of increases to the repo rate – increasing the cost of credit.<\/p>\n
The inflation rate for June 2022 is 7.4% up from 6.5% in May 2022. More concerning than these two figures being above the 6% target upper limit of the SA Reserve Bank, is the way these figures are being made up, said Blair.<\/p>\n
The Consumer Price Index report, published by Stats SA in June 2022, showed that the lowest two expenditure deciles – the 20% of people who spend the least – faced the highest inflation rate with the lowest decile facing 9.1% and the second lowest decile facing 8.5%.<\/p>\n
“This indicates that presently, the worst of the local inflation is being faced by the most marginalised groups,” said Blair.<\/p>\n
This makes sense as the proportion spent on basic goods such as food, fuel, and transport is much larger within the spending basket of the lowest expenditure deciles. Presently, food inflation is up 9%, electricity and other household fuels is 14.5% and petrol is up 45.3%.<\/p>\n
To the poorest consumers, this has a significant impact on their ability to meet their needs as their already stretched finances are now being asked to absorb the toughest of conditions faced by the SA economy from an inflationary perspective, said Blair.<\/p>\n
The SA Reserve Bank has acted in accordance with its mandate to keep inflation between 3% and 6%, and as a result, it increased the repo rate by 75 basis points (0.75%). In theory, increasing the cost of credit will reduce the demand for it and therefore slow down the pace of \u2018new money\u2019 entering the economy via credit channels, said Blair.<\/p>\n
This slowdown of funds entering the economy via credit channels will slow down the inflation rate as less money chases the same amount of goods. This may seem logical, however, what is the impact on economic growth when the economic policy is trying to slow down the rate at which credit is being used?<\/p>\n
Credit, when used constructively can assist economic growth as it allows credit users to take advantage of opportunities now, using money that they can pay back later. It therefore can act as a catalyst for facilitating things getting done sooner rather than later.<\/p>\n
By making credit more expensive, not as many opportunities that were once financially viable remain viable and therefore less than the full potential of the economy is realized as certain activities have become no longer economically viable at certain interest rate levels, e.g. new homeowners may not get the credit to buy new homes, said 21st Century.<\/p>\n
A closer-to-home consequence is that credit-active households tend to spend less as they not only consolidate their expenditure in reaction to their new credit repayments but also become more averse to taking out any more credit at these interest rates, said Blair. “This dilemma is exacerbated further by salary increases that lag the increasing inflation and that are definitely lower than the inflation rates felt by low-income people.”<\/p>\n
The net result can be dire on an economy that has the poorest citizens facing the greatest inflation, a small middle class under credit cost pressure, salary and wage increases that lag inflation and an economy that cannot create jobs.<\/p>\n
“If the middle class continues to have its purchasing power eroded, there will be less demand in the economy making the desperately-needed job creation even less likely due to expenditure being channelled to other expenses rather than demand-generating activities,” said Blair.<\/p>\n
One such example would be the demand for domestic helpers which tends to be a discretionary spend within SA\u2019s more wealthy households. As inflationary pressures go up, these jobs are placed under pressure due to their affordability.<\/p>\n
\u201cUntil the world adjusts to the pressure placed on various supply chains by the Ukraine-Russian war and the impact it has had on global oil prices, this inflationary problem will persist around the world.<\/p>\n
“Advanced economies are fortunate in that they tend to have the appropriate levels of financial protection built into their economies to weather such a storm, however, developing economies tend to suffer the brunt of such situations as their economies are often vulnerable in times like this.<\/p>\n
“The SA economy is one such developing economy that currently is battling high unemployment, low economic growth, high inflation and increasing interest rates. The economy and population should brace for tough times ahead,” said the chief executive.<\/p>\n