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Inflation differential main reason for credit growth and not a decline in household net financial po |
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Written by Staff Reporters
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A leading South African bank's economic research department has just produced statistics to show that consumers in the Common Monetary Area, i.e. South Africa, Namibia, Swaziland and Lesotho have not been using credit to finance spending. Instead, Deutsche Bank argues that spending patterns have not changed over the last ten years.
In the second paper of a series of three that investigates changes in the terms of trade, Deutsche Bank interprets the available statistics as indicating that growth in spending has been broadly matched by income growth. The bank says the household savings rate have declined by only 2.1% over the past 11 years. This is the clearest indication that families have not loaned money to finance consumer spending.
According to Deutsche Bank, nominal income growth has remained constant as a share of nominal GDP and real consumption has only grown faster than real GDP because consumer inflation was slower than GDP inflation. For a period of over 24 months, growth in credit to the private sector, both in South Africa and Namibia averaged above 13% monthly measured year on year. In some months, this statistic went above 19% and it even touched the 21% mark in one month last year. Analysts generally contributed the growth in borrowings to the relatively low interest rates and the comparatively low inflation environment making the (almost common sense) deduction that the borrowed money all went into buying lifestyle. This view is supported by the surge in consumption.
Deutsche Bank's research paper now says this is not so.
"In our view, this perception of a spendthrift South African consumer is not supported by the data. Consumer spending growth in SA has been broadly in line with income growth", says the bank. The result is the almost flat trend in household savings.
"Nominal household income growth and household spending growth has been in line with nominal GDP growth. This suggests that nominal consumer spending growth has not been excessive relative to developments in the rest of the economy."
The main reason for the growth in consumer spending is an increase in real purchasing power. Consumer inflation over the 11 year period was on average 2% per annum less than GDP inflation with the result that families gradually found themselves in improved net spending power positions. Given that all components remained largely in balance, spending power increased by 2% per year which makes a substantial difference to households' debt positions over 11 years.
Although Deutsche Bank clearly states that it is difficult to explain the above dynamics with clear-cut answers in an empirical way, it argues that statistics show that part of any household income goes into pension funds and insurance policies resulting in a reduction of the income actually received but a growth in the income accrued. This improves the liquidity of households.
Consequently, "if households want to increase spending closer to the levels of accrued rather than received income, they either need to borrow more or reduce their financial assets."
Since both equity and house prices have shown phenomenal growth over the last few years, in excess of interest rates, households are more likely to increase credit rather than reduce financial assets. Deutsche Bank argues that is has no impact on aggregate consumption or the net worth of households, but it can have a significant impact on credit growth. In short, because families are worth more, (through the gradual growth in disposable income) they liquidate this value and borrow against their improved financial assets but not for consumer spending, rather for further improvement of their underlying core assets namely property.
"Part of the credit growth has been for mortgages and has consequently financed residential investment. A further part has gone to corporates and has most likely been used to finance investment in productive capital."
But the bank concedes that this may not be the whole picture and offers an explanation based on the nature of disposable income.
"Households hold significant financial assets in pension funds and insurance policies. If the pension funds or insurance companies receive interest or dividend payments on these assets, these earnings accrue to and are included in household income, even though the households do not actually receive the money directly."
Using the increase in the value of their financial assets as collateral, households have borrowed money thereby choosing to increase their financial liabilities (offset by the increase in their net worth), as opposed to liquidate and reduce their financial assets.
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