Higher interest rates are negatively impacting South African households, as illustrated in the latest Altron FinTech Household Resilience Index (AFHRI), which shows a 2.4% decline in household financial resilience during the first quarter of 2023.

In the first quarter of 2023, the AFHRI recorded a value of 108.1, compared with 110.7 in the fourth quarter of 2022 and 110 in the first quarter of 2022.

According to the index, South African households are now worse off than during the pre-Covid-19 first quarter of 2020.

“After an initial strong recovery from the effects of the pandemic, which took the AFHRI to a record high in the fourth quarter of 2020, the index remained quite stable until the fourth quarter of 2021, coinciding with the South African Reserve Bank’s (SARB's) decision to start raising interest rates,” explained Altron FinTech commissioned economist and Optimum Investment Group economic adviser Dr Roelof Botha.

The AFHRI recorded a year-on-year decline in 12 of the 20 constituent indicators and a quarter-on-quarter decline in 14 indicators.

With a base level of 100 for the inception period of the index – the first quarter of 2014 - this means that the average household’s financial disposition has improved by only 8.1% in real terms over a period of nine years.

“The strongest indication of the financial pressure on households, induced mainly by higher interest rates, is reflected in the decline of more than 20% in the ratio of household income to household debt costs since the beginning of the year," Botha said, noting that this trend should be of significant concern to government’s economic policy makers outside of the SARB, as it will undoubtedly exert a negative impact on tax revenues and fiscal stability.

Since 2014, the average yearly improvement in the index is less than 1%, which serves as a clear indication of the economy’s under-performance, which has been exacerbated by the negative effects of a sharp increase in the cost of credit.

The return to restrictive monetary policy by the SARB since the end of 2021 has raised the cost of credit – and of capital – by 68%.

Despite clear indications that both the producer price index (PPI) and the consumer price index (CPI) had already peaked and had entered a decisive downward trend, SARB raised the repo rate by 50 basis points during the May 2023 meeting of the Monetary Policy Committee.

“Authoritative commentators have publicly voiced alarm over the damage caused by excessively restrictive monetary policy. The consensus view is straightforward, namely that the SARB is placing undue pressure on consumers, businesses and homeowners at a time when they are facing several other headwinds, most notably the cost of having to cope with electricity rationing and high energy prices.”

According to the AFHRI, in real terms, total household credit extension, which is valued at more than R2-trillion, declined by 3.4% since the first quarter of 2014, which means that there has not been any growth in this key macroeconomic indicator over almost a decade.

“It is simply not possible for the South African economy to grow at meaningful and sustained rates in the absence of real growth in household credit extension,” Botha said.

He pointed to other key conclusions of this quarter’s AFHRI, including that the financial resilience of households would have declined by a much larger margin in the absence of a welcome further increase in employment in both the private and public sectors, which represented one of the relatively few bright spots in the first quarter reading of the AFHRI.

“The upward trend in new job creation continued in the first quarter of 2023, with 258 000 new jobs having been created during the first three months of the year and almost 1.3-million since the first quarter of 2022,” he said.

However, the positive employment effect was not matched by total remuneration levels in the economy.

The average monthly remuneration in South Africa has declined by 4.4% over the past year, from R16 192 in the first quarter of 2022 to R15 473 in the first quarter of 2023. In real terms, the decline was 10.7%.

In addition, while surrenders of long-term insurance policies declined significantly since the fourth quarter of 2022, it remains almost 10% higher compared with the first quarter of 2022.

Further, during the first quarter of 2023, a sharp decline occurred in the value of long-term insurance claims paid, which could signal the intention of many savers to put their retirement plans on hold until such time as economic conditions start improving.