Consumer outlook is pessimistic

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Consumption, which traditionally contributes about 60 percent to South Africa’s gross domestic product, may disappoint next year.

Consumer confidence in the current quarter remained at levels last seen at the onset of the global financial crisis in the second half of 2008, FNB said on Tuesday. The consumer confidence index, compiled by the bank and Stellenbosch University’s Bureau for Economic Research, fell from -1 index points in the third quarter to -3 index points in the fourth.

“Coupled with rising inflation and a deterioration in the outlook for household income growth, low consumer confidence levels foreshadow subdued growth in household consumption expenditure next year,” FNB said.

It said the field work for the survey was conducted between October 24 and November 9, “before the brutal farmworker strike in De Doorns in mid-November, implying that the industrial action in the agricultural sector could continue to weigh on consumer sentiment in coming months”.

The bank noted the index had been losing ground since peaking at 15 index points at about the time of the 2010 World Cup. “With the average reading for the index at six since 1994, the latest reading of minus three implies that consumer confidence is low and not supportive of strong growth in consumer spending.”

The index combines the results of three questions posed to adults on the expected performance of the economy, the expected financial position of households and the rating of the appropriateness of the present time to buy durable goods, such as furniture, appliances and electronics.

Outlook

Consumers’ rating of the outlook for the national economy and the appropriateness of the present time to buy durable goods deteriorated during the fourth quarter, but their view of their own financial prospects remained largely unchanged.

The economic outlook sub-index slumped from -4 to -7, “indicating that most consumers continue to expect the economic situation in South Africa to worsen over the next 12 months. In fact, the economic outlook sub-index is currently at the lowest level since 2008, when the Eskom power crisis and ensuing global financial crisis plunged the South African economy into recession,” the bank said.

FNB consulting economist Cees Bruggemans said: “Given the adverse implications of the violent strikes in the mining, transport and now also agricultural sectors for fixed investment and job creation in South Africa, it is not surprising that consumers are becoming increasingly concerned about the outlook for the domestic economy.”

* Dawie Roodt, chief economist at the Efficient Group, said a confidence index is the measurements of certain financial aggregates such as the price of goods, the value of the stock exchange and people’s disposable incomes, expressed as a specific index.

“Confidence indexes are a bit of a misnomer and are often called ‘love indexes’ as they measure the way people feel about the economy,” explained Roodt.

“But while it is not a precise way to measure an economy, it is a very valid indicator of an economy’s underlying trend,” he said.

“If the economy is strong and people can see growth, they are more likely to spend money. In the run-up to the World Cup people were happy, so the index was high. But like this year, when the rand was weak, you were likely to see a negative for the index,” he said.

“There is a very strong school of thought that argues it is more important to get people to feel good about the economy to get it going than to implement good economic policy.”


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