Martin Endjala
Namibians have not been spared by the rapidly rising inflation and interest rates experienced across the globe over the past year and a half. Undue pressure on disposable incomes has raised concerns about household consumption dynamics.
“Weakening household consumption spending bodes ill for overall economic growth as consumer spending constitutes 78 percent of GDP,” economist,”Economist Ruusa Nandago said.
Nandago says weaker consumer spending is expected to persist based on various economic indicators such as elevated inflation and interest rates, high unsecured credit uptake growth, high levels of indebtedness and residential property weakness.
Nandago pointed out that the 2022 Annual National Accounts showed resilient household consumption whose growth was recorded at 14.4 percent, the highest since 2016. This is likely due to a 7.2 percent growth in employee compensation which beat inflation at 6.1 percent.
“Consequently, consumers’ disposable incomes grew by 6.7 percent in 2022 compared to 2.4 percent in 2021. In the 2023 Financial Stability Report, the Bank of Namibia attributes the growth in compensation and disposable income to the salary increase awarded to government employees,” she said.
In August 2022, the government granted a basic salary increment of three percent and a 14 percent transport allowance increment for all civil servants, as well as an 11 percent housing allowance increment for non-managerial civil servants.
However, in the first quarter of 2023, GDP data shows that the lagged impact of the high inflation and interest rate environment is now filtering through to consumer spending, with growth during this period averaging a three-year low of -4.4 percent.
“Although household consumption remained resilient in 2022, we are of the view that the lagging impact of high inflation and high-interest rates will keep household consumption on the back foot. Inflation has decelerated from its peak of 7.3 percent to 6.3 percent in May 2023, in line with the general disinflationary theme observed across the globe,” the Economist said.
A disinflationary trend, by definition, means that prices are still rising, albeit at a slower rate. Therefore, slower inflation does not necessarily mean consumers’ cost of living will materially reduce. Prices remain high and will continue eroding consumer disposable income and purchasing power.
As a result, there is now an increased currency risk factored into the inflation outlook. In the 2023 Financial Stability Review, the South African Reserve Bank noted the risk that load-shedding poses to food inflation through two channels.
The first is higher input costs associated with the use of diesel generators, and the second is wastage and spoilage of food because of extended periods of power cuts.
This would result in higher costs being passed on to the consumer and shortages of food products, which would filter through to higher inflation.
These dynamics, Nandago said, will have spillover effects on Namibia’s inflation. She said she expects inflation to remain unchanged at 6.1 percent in 2023.
Furthermore, given that inflation risks are tilted to the upside in South Africa, the risk of further rate hikes cannot be ruled out and the probability of rate cuts in 2023 is minimal.
Interest rates are therefore expected to stay higher for longer in both South Africa and Namibia. In the absence of substantial wage increases, this will further increase household indebtedness and debt servicing costs, weighing on consumers’ disposable income.
Consequently, this is expected to have a dampening effect on private sector credit uptake, which is projected to average 2.9 percent in 2023.
The weak household consumption outlook is said to translate into behavioural changes for consumers, where the focus will be on forgoing luxuries and downsizing.
Nandago stressed that this is necessary to shift spending from non-essentials such as entertainment, to essentials such as food and debt repayments.
