Namibia has not been spared from the rapidly rising inflation and interest rates experienced across the globe over the past year and a half. This has raised concerns around household consumption dynamics, given the pressure on disposable incomes. Weakening household consumption spending bodes ill for overall economic growth as consumption spending constitutes 78% of GDP.
According to FNB Namibia economist, Ruusa Nandago, the 2022 Annual National Accounts surprisingly showed resilient household consumption whose growth was recorded at 14.4% - the highest since 2016. This, Nandago noted, is likely due to a 7.2% growth in employee compensation which beat inflation at 6.1%.
The FNB economist also pointed out that consequently, consumers’ disposable incomes grew by 6.7% in 2022 compared to 2.4% 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. In August 2022, the government granted a basic salary increment of 3% and a 14% transport allowance increment for all civil servants, as well as an 11% housing allowance increment for non-managerial civil servants.
The first quarter of 2023 GDP data, however, shows that the lagged impact of the high inflation and interest rate environment is now filtering through to consumption spending, with growth during this 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 stated.
She added that although household consumption remained resilient in 2022, FNB is of the view that the lagging impact of high inflation and high interest rates will keep household consumption on the backfoot.
“Inflation has decelerated from its peak of 7.3% to 6.3% in May 2023, in line with the general disinflationary theme observed across the globe. 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 to erode consumer disposable income and consequently purchasing power,” Nandago cautioned.
She further warned that increased currency risk is now factored into the inflation outlook. In the 2023 Financial Stability Review, the South African Reserve Bank (SARB) 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/or spoilage of food because of extended periods of power cuts. This Nandago expects will result in higher costs being passed on to the consumer and shortages of food products, which would filter through to higher inflation. These dynamics are expected to have spillover effects on Namibia’s inflation, and Nandago expects inflation to remain unchanged at 6.1% in 2023.
“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, we expect this to have a dampening effect on private sector credit uptake, which we project to average 2.9% in 2023,” Nandago stated.
Meanwhile, the weak household consumption outlook is anticipated to translate into behavioural changes for consumers, where the focus will be on forgoing luxuries and downsizing. This will be necessary to shift spending from non-essentials (such as entertainment) to essentials (such as food) and to debt repayments.