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By Moneyweb

Moneyweb: Journalists

SA’s middle class is broke

Average salaries are down in real terms while the cost of living spirals…

With a sharp, rapid rise in interest rates – prime is now 11.25%, up from 7% in the past 17 months – households are under immense pressure.

Car and home loan repayments have increased by an average of 12% and 38% in rand terms respectively, according to data from Absa (a far larger proportion of a home loan repayment comprises interest).

Inflation remains elevated and outside the South African Reserve Bank’s target range which has resulted in yet more interest rate hikes. However, average monthly salaries in the country have slipped by 4.8% (to R14 318) from a year ago, according to the BankservAfrica Take-home Pay Index.

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Pay increases have simply not kept up with the rising cost of living.

Investec chief economist Annabel Bishop says this declining real wage environment is “very negative” for the economy as “continuously falling real incomes reduce consumers’ spending power, which is a huge suppressor on demand … weakening economic growth”.

Households are being hit from all sides. And the further up the middle-class continuum one moves, the more likely it is people are paying significant amounts to supplement services that the state would ordinarily provide: think private healthcare, private security, private education – and, increasingly, private energy generation/water supply/refuse removal.

Risks to household finances

What’s alarming is that there are so many other risks to household finances that consumers see high interest rates as only the eighth most important threat, according to Momentum and Unisa’s Consumer Financial Vulnerability Index.

Load shedding is first on the list – more than 90% see it as a high risk to consumer finances – and the effects of constant power cuts are being felt across the economy. Producers and retailers’ need to burn millions of litres of diesel to keep trading is further impacting prices, as households already face skyrocketing food, energy and transport prices.

Consumers are down-trading and cutting back on unnecessary expenditure to make ends meet (evidence of this can be seen in company earnings reports from ‘SA Inc’ companies, where growth has either slowed dramatically or reversed). They are also relying on expensive short-term debt.

Recent spending data from Capitec shows that across its 20 million clients, (forced) increased spending in certain categories is coming at the expense of others.

Its customers are spending 16% more on fuel and 8% more on groceries than a year ago.

Lower income consumers feel the brunt of food price increases, with their grocery spend for the mass market segment up by 47% between 2019 and 2022 according to Visa and Discovery Bank’s SpendTrend23 report. So-called ‘Mass Affluent’ and ‘Everyday Affluent’ customers (the middle class) are spending 12-14% more, while high-net-worth individuals have seen an increase of just 4%.

Load shedding drives fast food sales

Restaurant spend is up 7% according to Capitec’s data while fast food purchases grew by 36%, albeit off rather low bases (compared to other categories). Consumers are being forced to these alternatives due to load shedding. The impact of this can be seen in robust financial results for Spur Corporation and Famous Brands. Consumers remain incredibly price-sensitive, though, with value offerings (and brands) outperforming the rest.

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Electricity spend is only up 2% over the same period which makes sense given that a constant supply of power has not exactly been available of late.

This needs to be seen within the context of the 9.65% increase in electricity tariffs last year (a further 18.65% increase has taken effect, although most consumers will only pay more from the start of the municipal financial year in July).

The belt-tightening comes at the expense of three main categories: home maintenance (down 13% over the last year), alcohol (9% lower) and spending at pharmacies (a 30% drop, but off a relatively smaller quantum of spend).

Things are bad if people are cutting back on booze.

More than one in 10 card swipes, cash withdrawals and debit orders combined among Capitec clients (or 10.7%) is now declined due to insufficient funds. This is nearly 50% higher than the ratio just three years ago (March 2019 to February 2020, that is, pre-Covid-19). It says these declined transactions are being driven by “declining inflows, lower bonuses and less overtime”.

Salaries not keeping pace

The numbers are scarier when one looks at the average debit order amounts across the pool of 20 million clients. Home loans are up 20%, vehicle finance by 15%, with a 15% increase in personal loans. Debit orders for education (school or tertiary fees) are down by 15%, with a slight decline in the value for insurance (1%). Debit orders for investments are not keeping up with inflation – these increased just 3%.

Capitec says the average weighted growth across all spending categories was 5%, while the growth across the debit order categories was 12%. The average increase in salaries (or regular deposits) over the same period? Just 4%.

You can see the problem.

The market is pricing in at least one further interest rate increase this year, which will put further strain on households. Already-high levels of debt (nearing the highest levels in a decade) will rise.

The number of vehicle and house repossessions will increase (already anecdotal evidence suggests a spike in auctions of the latter). Plus load shedding will almost certainly get worse before it gets better, and inflation is projected to slow only gradually over the next two years. Buckle up.

This article originally appeared on Moneyweb and was republished with permission. Read the original article here.

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