Rising Interest Rates And Inflation Pose Challenges For Household Consumption

By:Justicia Shipena
High interest rates and high inflation will continue to have a drag on household consumption, says Ruusa Nandago, an economist at FirstRand Namibia, in the Namibia Household Consumption Report released on Tuesday.
In May 2023, inflation had slowed from its peak of 7.3% to 6.3%, following the broad disinflationary trend seen around the world.
According to data provided by the Namibia Statistics Agency (NSA), the country’s average inflation rate increased to 6.8% during the first five months of 2023 from 4.9% during the same period in 2022.
“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 backfoot,” Nandago stated.
She pointed out that decreased inflation does not necessarily imply a meaningful drop in the cost of living for consumers.
She also stated that because prices are still high, consumer disposable income and, by extension, purchasing power will continue to decline.
Hence she said there is now increased currency risk factored into the inflation outlook.
TheSouth African Reserve Bank (SARB) recognised the danger load-shedding posed to food inflation through two pathways in its 2023 Financial Stability Review. The first is increased input costs linked to the use of diesel generators, and the second is food waste or spoilage brought on by prolonged power outages.
Nandago said this scenario will lead to higher prices being passed on to the consumer and shortages of food items, which would then lead to greater inflation. The dynamics will also have an impact on inflation in Namibia.
“We expect inflation to remain unchanged at 6.1% in 2023,” she pointed out.
The FirstRand Namibia economist contends that because South Africa’s inflation risks are skewed upward, rate increases in the future are not completely out of the question and rate cuts in 2023 are unlikely.She went on to say that because of this, interest rates are anticipated to remain higher for longer in both South Africa and Namibia.
With high interest rates, Nandago said this will lead to an increase in household debt and debt servicing costs in the absence of significant salary growth, which will reduce consumers’ disposable income.
“We expect this to have a dampening effect on private sector credit uptake, which we project to average 2.9% in 2023,” she noted.
The economist predicts consumers’ behaviour will shift as a result of the poor household spending outlook, with a focus on giving up luxuries and downsizing. This will be required to change spending priorities from non-essentials to necessities (like food) and debt repayment.
Namibia has not been exempt from the fast rising inflation and interest rates experienced around the world over the past 18 months, which weigh on private spending.
Since household consumption spending accounts for 78% of GDP, Nandago said it is bad news for overall economic growth.
According to GDP data for the first quarter of 2023, consumption spending is now feeling the lag effects of the high inflation and interest rate environment, with growth during this time period averaging a three-year low of -4.4%.
“We expect weak consumption spending to persist based on various economic indicators namely elevated inflation and interest rates, high unsecured credit uptake growth, high levels of indebtedness and residential property weakness,”Nandago emphasised.
She said load-shedding-related restrictions in South Africa, which is Namibia’s primary food importer, has kept food inflation high.
The FirstRand Namibia’s report anticipates a significant drop in spending activity considering that food and transportation account for 31% of Namibia’s inflation basket altogether.
The Bank of Namibia increased rates by a total of 400 basis points (bps) in just 17 months, making Namibia the country with the sharpest cycle of rate hikes in history.
Interest rates are currently 150bps higher than they were before to the epidemic, at 7.75%.
Nandago stated that Namibian consumers are heavily indebted, with outstanding household debt standing at N$65.8 billion and a debt-to-disposable income ratio of 86.0% for both bank and non-bank loans.
In line with a rise in the prime rate, she said the debt servicing to disposable income ratio increased slightly from 5.7% in 2021 to 6.2% in 2022.
“At this level of indebtedness, households are more susceptible to income shocks such as those from high interest rates and high prices, which is likely to substantially reduce consumer spending.”
The FB Housing Index continued to decline for the majority of 2022, averaging -2.8% in terms of both prices and transaction volumes.
“We attribute the weakness in the residential property market to the high inflation and high interest rate environment that has reduced consumer affordability,” Nandagosaid.