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Interest rate shifts impact employment, retail industry

7 Mar 2012

Dr JC Jordaan, independent researcher with the Bureau of Market Research (BMR) at Unisa, recently published research to estimate the impact on the economy of the 100 basis point increase in the interest rate, with the focus on households.

According to the report, the results from the macro-economic model show a reduction of -0.54% in the nominal GDP because of the increase in the nominal interest rate, given a 3-quarter lag. This equates to a decrease of -R13 billion in the GDP (in 2009 prices). The real GDP impact is estimated at -0.22% or a decrease of R5.3 billion in the GDP. Employment opportunities can decrease by more than 26 000.

The impact analysis per household and per expenditure decile shows that, as expected, the biggest percentage impact is on the higher income households. Expenditure of households in the highest decile decreases by 0.6% compared to a 0.23% decrease for the poorest households. Households in the 10th decile (whose expenditure was on average R248 823 per year in 2005/06, according to the Income and Expenditure Survey of Stats SA) will have to pay on average just more than R1 500 per year more on interest payments compared to R26 per year for the poorest household decile (whose expenditure averaged R11 381 per year in 2005/06).

Richer households

Richer households repay more on interest, given higher access to credit. Highly skilled individuals also have the highest percentage drop in employment at -0.28% (compared to -0.22% on average).

The study also shows that the greatest (number) employment impact is on the skilled, semi-skilled and unskilled and informal sectors of the economy, where an estimated 21 736 individuals may lose their jobs. This implies that the impact of interest rate increases will be greater on poor uneducated families compared to better-educated wealthier families. The large number of unskilled and semi-skilled employment opportunities that are lost, further drives the loss in labour income

Retail industry to be hard hit

According to Jordaan, the sector that shows the biggest rand value impact and employment impact is the wholesale and retail trade sector. The results show that the total output in this sector can decrease by more than R6.3 billion or the sector can lose 3 800 employment opportunities. This is to be expected given the size of the retail sector in South Africa. The biggest impact, in percentage terms, is on the beverages and tobacco sector at -0.4%.

Looking at the BMR results, employment accommodative policy would encourage lower interest rates (although the impact of lower interest rates on inflation and the impact of inflation on lower income groups should also be considered).