The results of the Altron FinTech Household Resilience Index (AFHRI) for the fourth quarter of 2024 have been released, confirming a modest improvement in the financial position of South African households – mainly due to three cuts of 25 basis points each in the repo rate between September 2024 and January 2025. This led to the lowering of the prime overdraft rate to 11% from a record high of 11,75%.
But according to economist Dr Roelof Botha, who compiles the index on behalf of Altron FinTech, households are not out of the woods yet. At the latest meeting of the Monetary Policy Committee (MPC) of the Reserve Bank the rate-cutting cycle was halted, which will prevent the debt cost burden of households from dropping to a level that would encourage a more permanent recovery of household expenditure – the key driver of aggregate demand in the economy.
The increase in the AFHRI during the fourth quarter of 2024 also reflects the seasonal influence of year-end bonuses paid to a large component of formal sector employees, as well as temporary jobs created during the summer holiday season, especially in the tourism and retail sectors. Furthermore, withdrawals from pension funds and other investments related to the so-called two-pot system artificially inflated the performance of the AFHRI, an effect that is likely to become more subdued during 2025 and that is detrimental to the financial disposition of households in the longer term.
It is more informative to focus on the AFHRI’s four-quarter average, which, by definition, eliminates seasonality. This indicator has started to recover, but remains barely above the level recorded at the end of 2021, when the MPC started its relentless cycle of interest rate increases, despite lacklustre GDP growth and an obvious absence of excess demand in the economy.
Debt costs of households remain high
Although the ratio of household debt costs to disposable incomes has declined to 8,9%, this remains significantly higher than the 6,8% level in 2021, prior to the decision by the MPC to adopt a restrictive monetary policy stance at a time when the economy had embarked on a fragile recovery from the Covid pandemic. The cost of credit (and of capital formation) in the South African economy remains 31% higher than four years ago – one of the main reasons for the lethargic economic growth rate that moved in tandem with each increase in the repo rate.
PMI in negative territory
The decision by the MPC at its March policy meeting not to lower the repo rate further is regrettable, as several key economic indicators continue to show weakness, with business confidence having retracted since the beginning of the year. The S&P Global Purchasing Managers’ Index for South Africa fell to 47.4 in January 2025, down from 49.9 in December, marking the sharpest contraction in the private sector since July 2021.
Although it recovered to 48.3 in March 2025, it has now been in contraction territory – below 50 – for four successive months. The main reason for the decline in this indicator is weak demand that has driven further declines in output and in new orders.
SARB out of sync with key trading partners
Several of South Africa’s key trading partners have recently adopted a more accommodating stance towards monetary policy, with central banks in the Eurozone, Switzerland, Canada and Australia having lowered rates since February. Although the Australian monetary authorities have stated caution in respect of a further easing of monetary policy, the reason for this is related to the existence of a strong labour market – a luxury that does not remotely exist in South Africa. It should also be pointed out that all of South Africa’s key trading partners enjoy a significantly lower real commercial lending rate than South Africa. This serves to erode South Africa’s international competitiveness.
Building construction activity in deep recession
The Afrimat Construction Index for the fourth quarter of 2024 indicated a marginal quarter-on-quarter increase of 0,5%, which was below the rate recorded for the country’s GDP. Of particular concern is the lengthy and steep decline in the values of building plans passed and buildings completed in the country’s metros and larger municipalities.
Any significant decline in construction sector activity will necessarily exert a negative impact on the AFHRI, due to the twin effects related to the large weighting of employment in the AFHRI and the fact that the construction sector is the most labour-intensive sector in the economy. The extent and duration of the decline in the values of building plans passed and buildings completed should be of huge concern to the country’s economic policy makers.
During the fourth quarter of 2024, these two indicators were 20.8% lower and 24.6% lower, respectively, than four years ago – just before the record high interest rates started to bite into the disposable incomes of households.
It is also evident that the marginal lowering of interest rates has not been remotely sufficient to lift the building construction sector out of its deep recession. Since the first quarter of 2022 (when interest rates started rising), the average monthly real value of building plans passed has declined by more than 33%. The decline in the value of buildings completed – at more than 47% – has been even worse. Of particular concern is the fact that the lowering of the repo rate has been insufficient to reverse the downward trajectory for these indicators, with year-on-year declines having been recorded in the first two months of 2025.
The true reason for lower inflation
It is perplexing to note that the MPC recently claimed credit for a lower inflation rate when, in fact, the decline in the consumer price index (CPI) was the result of a steep decline in the producer price index (PPI) caused by a normalisation of oil prices and global freight shipping charges. As a result of the Covid pandemic and the Russian military invasion of Ukraine, these had increased five-fold and eight-fold, respectively, over a period of less than eight quarters, which led to an unheard-of escalation in global price indices.
Transport costs represent a significant part of the composition of cost-push inflation within most sectors of the economy, and South Africa did not escape the negative impact on the CPI. Once the base effect on the subsequent lower fuel and shipping costs had kicked in, it was entirely predictable that the South African PPI would drop to close to zero – which occurred several months ago. At the end of April 2025, the price of Brent crude oil had declined by 44% from its level at the end of June 2022, which represents a key reason for the sustained decline in South Africa’s PPI to its current level of barely above zero – raising questions over the MPC’s refusal to lower interest rates more aggressively to pre-Covid levels.
At the beginning of 2020, the real prime rate was around 5%, not nearly low enough to stimulate demand in the economy. During the term of the previous Governor of the Reserve Bank, Gill Marcus, the real prime rate averaged 3,1% and real GDP growth averaged 2,6%. The real prime rate is now 8,3% (an increase of 168% in the cost of credit and of capital) and GDP growth is below 1%.
High interest rates to blame for lower per capita incomes
It is also perplexing to take note of a recent comment by the Governor of the Reserve Bank alluding to a neutral impact on aggregate demand as a result of the restrictive monetary policy that has lasted for more than three years. This is a fallacious statement, as it is abundantly clear that high interest rates have come at a substantial cost to the economy, especially via a consistent lowering of per capita disposable incomes in real terms.
The latter represents the dominant driver of aggregate demand in the economy and, consequentially, GDP growth. In 2021, on the back of a nominal prime rate that was 400 basis points lower than it is now, the country’s real per-capita disposable income recovered to within a whisker of the level immediately prior to the Covid lockdowns. Since then, it has declined by more than 2,6% to just above R74,000, compared to more than R78,000 when Gill Marcus was in charge of monetary policy.
Results of the AFHRI for the fourth quarter of 2024
The fourth quarter of 2024 witnessed an improvement in the AFHRI for a third consecutive quarter, thereby re-establishing a familiar trend in the average financial disposition of households, namely a predictable weaker first quarter of the year (following the previous quarter’s year-end bonuses and higher employment levels), which gradually improves until the next fourth quarter bonanza.
In the event of the country’s monetary authorities appreciating the dire need for higher growth and employment creation, further rate cuts will be on the cards. However, until the prime overdraft rate declines to somewhere between the pre-Covid rate of 10% and the more accommodating rate of 7% immediately after the Covid lockdowns were lifted, the economy is unlikely to grow at more than 1,5% in real terms, even after taking the low base effect into consideration.
The downside
As was the case with the third quarter reading of the AFHRI, the latest results need to take cognisance of the spike in the indicators for long-term insurance surrenders and lump-sum pension payments. These have been influenced by the so-called two-pot retirement system, which commenced in the third quarter of 2024 and has led to a significant increase in retirement fund withdrawals. When these two indicators are included at their values recorded in the third and fourth quarters of 2023, the AFHRI’s year-on-year and quarter-on-quarter increases drop to 1,4% and 1,2%, respectively. Viewed from the longer-term perspective, it is also concerning that households have been sacrificing considerably more of their incomes on servicing debt – a direct result of the restrictive monetary policy over the past three years.
On a positive note:
Fortunately, a number of positive trends are evident amongst key indicators of the fourth quarter AFHRI reading, including the following:
- Private sector employment has increased and is at a higher level than before Covid and also higher than in 2014 (the AFHRI inception date). The latter half of 2024 witnessed a welcome increase in employment, which could gain momentum during 2025 if interest rates decline further and if progress is made with the repair and expansion of the country’s infrastructure.
- Real levels of labour remuneration in the private sector have increased, both on a quarter-on-quarter and year-on-year basis.
- The higher value for unit trust assets, which serves as a proxy for the net asset value of companies listed on the JSE, may well provide a boost to the levels of collateral required by households when applying for secured debt.
- The rise in the ratio of household wealth to household income, which serves as a proxy for non-salaried income for many households, is bound to increase further in the event of South Africa lifting its GDP growth rate in 2025. The latter seems bound to accelerate now that the Government of National Unity has prioritised higher economic growth in a partnership with prominent business leaders.
The MD of Altron FinTech, Johan Gellatly, emphasises that the latest AFHRI figures highlight the ongoing financial challenges faced by South African households, despite the modest improvement.
“The data clearly shows that while we’re seeing some recovery, households remain under significant financial strain following this period of high interest rates. The marginal interest-rate cuts have provided some small relief, but more substantial monetary policy easing is required to meaningfully improve household financial resilience, especially in the face of the diminished global growth figures anticipated this year. Without further reductions, we risk prolonged economic stagnation as consumer spending remains suppressed. At Latron FinTech, we will continue to assist our clients to make best use of the solutions we provide to weather this storm with comparative success.”