Stagnating income growth expected to lead to more conservative spending
The Household Sector battles to improve its debt and saving situation, amidst stagnating income growth, reports FNB Home Loans household and property sector strategist John Loos, in the latest FNB Property Barometer.
Stagnating economic growth, translating into slowing employment and income growth, has made it tougher for the country’s Household Sector to make further much needed financial improvements in terms of reducing its Debt-to-Disposable Income Ratio and raising its savings rate.
The 3rd Quarter 2015 SARB (Reserve Bank) Quarterly Bulletin shows the 3rd quarter Household Debt-to-Disposable Income Ratio as rising slightly, from a previous quarter’s revised 77.7%, to 78.3%. Although this is still significantly lower than the all-time high of 88.8% back in early-2008, our feeling is that it remains unacceptably high, and we had hoped for further decline in order to reduce the Household Sector’s vulnerability to economic and interest rate shocks.
This was not to be, however, as slow nominal Disposable Income growth requires a very slow Household Sector Credit growth rate in order to sustain the downward trend in the ratio.
Household Sector Credit growth is indeed pedestrian. But Nominal Disposable Income growth continued its multi-year slowdown, from an 11.1% year-on-year high in the 2nd quarter of 2011, to 5.5% by the 3rd quarter of 2015, and Household Sector Credit just started to outgrow it in the last quarter.
In real terms, Household Disposable Income growth also slowed in the 3rd quarter, from 1.9% year-on-year in the previous quarter to 1.6%. This is still a higher growth rate than the 1% year-on-year economic growth rate, in part supported by very low consumer inflation of late.
A further loss of momentum in the quarter-on-quarter annualized growth rate in real disposable income, to 0.7% in the 3rd quarter, points to further slowing in year-on-year growth to come.
Not surprisingly, therefore, the downward pressure in disposable income growth led to a slower Real Consumption Expenditure growth rate in the 3rd quarter, to 1.5%, (0.9% on a quarter on quarter annualized basis) from a previous 1.7% (1.2% quarter on quarter annualized).
The highly cyclical Durables category of Consumption Expenditure led the way lower, turning negative on a quarter-on-quarter annualized basis to the tune of -0.3%. Given this category’s typical “leading indicator” status, this seems to point to further weakening in Real Consumer Spend growth.
Average wage inflation well-above CPI inflation has been key in providing some additional support for Real Disposable Income growth and Consumer Expenditure Growth in these times of weak economic growth.
2nd quarter labour data released in the Quarterly Bulletin suggests that this was still the case as at mid-2015, with average year-on-year growth in Formal Sector Employee Remuneration accelerating to 8.7%, its highest rate of growth since late-2010.
However, we are of the belief that this source of support will diminish in the near term, as it has led to the domestic wage bill increasing as a percentage of GDP, eating into operating surpluses. The result is rising pressure on the commercial sector of the economy to curb employment levels should this continue, in order to contain wage bill growth.
Slowing economic growth aside, Consumer Spend growth has additional mild downward pressure emanating from gradually rising interest rates. Rising interest rates have contributed to a rising Household Debt-Service Ratio (The interest cost on the Household Debt Burden expressed as a percentage of Disposable Income), from 8.5% at the end of 2013 to 9.6% by the 3rd quarter of 2015.
Prime rate rose from 8.5% to 9.5% over the period (and has since risen 25 basis points further in the 4th quarter of 2015). However, the Average Interest Rate on Household Debt rose slightly faster over the period from 10.7% to 12.3%, due to the higher priced short term categories of credit growing at faster rates than the lower priced mortgage credit.
The news didn’t get better when it comes to growth in Household Sector Net Wealth. A sluggish economy implies slower asset price growth, the result being that year-on-year growth in the Value of Net Wealth slowed further to 3.8% in the 3rd quarter, down from the prior quarter’s 5.2% and now well below the 20.6% high of the 2nd quarter of 2014.
This has meant the 2nd consecutive quarter of mild decline in the Household Sector Net Wealth-GDP Ratio, from 363.6% in the 1st quarter of 2015 to 348.4% in the 3rd quarter.
We expect pressure on net wealth going forward to ultimately lead to a rise in Household Sector Savings. But this has yet to happen. The Net Savings rate (Gross Savings less Depreciation on Fixed Assets) remained negative at -2.3% of Disposable Income in the 3rd quarter, a little worse than the prior quarter’s -2.2%.
Despite the mounting pressure on consumer finances, however, we have yet to see a noticeable rise in financial stress. Rising interest rates and a rising Debt-Service Ratio have not yet translated into a noticeable rise in key Household Sector Credit Health Indicators. As at the 3rd quarter, Total Insolvencies continued to decline
Summing it up, the SARB Quarterly Bulletin continued to point to mounting constraints on Consumer Finances in the 3rd quarter. Disappointingly, this stalled the downward trend in the all-important Debt-to-Disposable Income Ratio. It has also arguably postponed the start of an improving savings ratio.
Ultimately, though, we expect that these pressures will lead to a more conservatively spending Household Sector, and improvement in both of these ratios.