Household debt 'to normalise'
Michael Appel
31 October 2007The ratio of household debt to disposable income among South African earners reached a peak of 76.6% in June 2007 but should return to more sustainable levels in the near future as interest rate hikes take their toll, says Finance Minister Trevor Manuel.
Delivering his Medium Term Budget Policy Statement in Parliament in Cape Town on Tuesay, Manuel said that "as the economy has grown more rapidly, it has begun to show signs of strain, reflected in rising inflation and a high current account deficit."
He said the purpose of the "mini-budget" was to present a framework and a set of spending priorities to shape the budgets of national, provincial and local government.
"It is intended to encourage parliamentary and public debate on how South Africa will meet the social and economic challenges ahead," he said.
Parliamentarians were told that in South Africa, as with any small and open economy, rapid increases in investment spending tends to put pressure on domestic capacity, raising imports and raising prices.
However, the National Credit Act and a possible rate hike in December were singled out for reducing consumer spending.
"Investment has played a major role in strong economic growth, rising from about 15% of gross domestic product (GDP) in 2002 to nearly 21% in the first half of 2007," the mini-budget states.
"The ratio of fixed investment to GDP of 25% by 2014 should be achieved ahead of schedule, helping to reduce capacity constraints and supporting sustained higher growth."
Food, oil drive inflation
Despite Reserve Bank Governor Tito Mboweni's repeatedly warning the public that rampant consumer spending would only further fuel inflationary pressure, household consumption expenditure continued to rise at a rate of 7.4% in the first half of 2007.
However, the decline in the sale of motor vehicles and other interest-sensitive durable goods indicates that South African's are reducing spending to a degree.
The consumer price index excluding mortgage costs (CPIX), which is used by the Reserve Bank for inflation targeting, has been outside the prescribed 3-6% target band set by the Bank since April 2007.
Analysts believe inflation has not yet peaked and will only do so by about February 2008, returning to within the inflation range by the second quarter of next year.
"External shocks to food and oil prices have been the primary drivers of inflation over the past year, but inflation pressures have broadened recently due to buoyant demand and capacity limits in domestic industry," Manuel told MPs.
"There is [also] significant wage pressure in the economy following a series of strikes in the first nine months of the year. Average wage settlements are expected to be in the range of 7 to 8% in 2007 from 6.5% in 2006."
The inflationary cycle that began in June last year reflects the growing need for more balanced growth in the economy, with the South African Treasury believing this can only be achieved through a moderation in household consumption, and as constraints ease as a result of sustained investment.
Source: BuaNews
