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Household consumption slipped in the second quarter of 2018 as people adjusted their spending habits following the VAT hike and fuel price increases, according to the South African Reserve Bank’s quarterly bulletin released on Tuesday.
The SARB noted that household spending was also suppressed by “diminishing wealth effects” in the first eight months of 2018, as the FTSE/JSE All-Share Price Index fell on a combination of negative sentiment towards emerging markets and domestic policy uncertainty, relating to how land expropriation without compensation would play out.
Consumers have been hard hit by the VAT hike from 14% to 15%, effective from April 1 and five successive months of fuel price increases.
The research note by the central bank painted a grim picture of the economy falling into recession in the second quarter of 2018, with negative gross domestic product growth in the first six months of the year and unemployment rising to 27.2% in April, May and June.
However in contrast to falling consumer expenditure, state spending increased with government contributing positively to GDP figures in the second quarter of 2018.
Household credit growing steadily
The Reserve Bank reported that while the household credit market remained “very subdued” during the second quarter of 2018, growth in household credit extension continued to trend steadily upwards over this period. Loans to the private business sector remained subdued and increased at a slower pace.
While households are battling the impact of the VAT increase, government’s finances are in slightly better shape due to the one percentage point hike. Former Finance Minister Malusi Gigaba said in February that the VAT hike was expected to raise an additional R22.9bn.
The central bank's quarterly bulletin stated that the cash book deficit of national government was much smaller in April, May and June, than the previous year as revenue was boosted by the tax hikes.
The rand decreased against the US dollar by 10% in the second quarter, following the local currency’s relative strength in the first part of the year.
The Reserve Bank said the rand’s weakness was largely due US dollar strength, higher international oil prices, increased global inflation and risk aversion towards emerging markets.
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