Consumer confidence at lowest level since 2017
After holding firm during very weak economic growth and rising unemployment rates, consumer sentiment finally slumped deep into negative territory during the third quarter of this year. The First National Bank/Bureau for Economic Research Consumer Confidence Index (CCI) plunged from +5 points during the second quarter of this year to -7 during the third quarter.
Consumer sentiment rocketed to a historic high of +26 points at the height of Ramaphoria in the first quarter of last year, but started to backpedal shortly afterwards. However, for four consecutive quarters - from the third quarter of last year to the second quarter of this year - consumer sentiment remained within a fairly tight (yet positive) range of +2 and +7 points, before capitulating during the third quarter of this year. The latest reading of -7 points is the lowest since the fourth quarter of 2017 (-8) and well below the long-run average reading for the CCI (of +2 since 1994).
The index has three components: economic outlook, household financial outlook, and consumers’ assessment of whether the present is a suitable time to buy durable goods. The sharp drop in the overall index can mainly be ascribed to a complete reversal in the economic outlook sub-index (from 11 to -17) and a further deterioration in the “time to buy durable goods” index (from -10 to -15). Whereas in the second-quarter of this year’s survey consumers expected South Africa’s economic prospects to improve, the vast majority of consumers now expect the domestic economic outlook to deteriorate further.
FNB economist Siphamandla Mkhwanazi says: “A confluence of adverse economic developments in all likelihood contributed to the slump in consumer sentiment, including rapidly rising unemployment, declining real per capita incomes, news of a further massive R59billion government bailout to Eskom, and an upsurge in xenophobic violence in South Africa. In addition, the rand has depreciated notably in recent months, while the South African Reserve Bank’s decision to keep the main policy interest rate unchanged in September may have disappointed indebted consumers that were hoping for another interest rate cut.
“Finally, consumers may also be suffering from some post-election blues - consumer confidence increased during each of South Africa’s four previous election quarters, but then declined somewhat again during the quarter following the election.”
It depends what you earn
A breakdown of the CCI according to household income group shows that consumer sentiment deteriorated significantly across all income groups, but especially so among high-income consumers. High-income consumers (earning more than R14000 a month) not only turned pessimistic about the outlook for the economy and the appropriateness of the present time to buy durable goods, but they are also becoming increasingly concerned about the outlook for their own household finances.
Similarly, the outlook for the household finances of higher-middle-income consumers (earning between R8000 and R14000) deteriorated from +17 to +13.
In sharp contrast, low-income (earning less than R3000 a month) and lower-middle-income consumers (earning between R3000 and R8000) became more optimistic about the outlook for their household finances. The household financial outlook index for low-income consumers improved from +9 to +13, while that of the lower-middle income group jumped from +14 to +24 index points. This is the second consecutive quarter that the number of low and lower-middle income consumers expecting an improvement in their household finances has increased.
Mkhwanazi said: “The financial position of less affluent households has in all likelihood been underpinned by the introduction of the national minimum wage in January, sustained above-inflation growth in social grants expenditure by the government, and a significant acceleration in credit extension to low-income consumers. In sharp contrast, high-income consumers are receiving lower bonuses, commissions and overtime payments amid weak economic growth and are likely becoming wary about the tax implications of successive government bailouts for struggling state-owned enterprises. High-income consumers, in particular, may also have been overly optimistic about what President Ramaphosa could achieve in a relatively short period of time, and some of these unrealistic expectations have now been dashed.”
Boosted by a surge in consumer confidence following Ramaphosa’s election in the first quarter of last year, high consumer confidence levels stood in sharp contrast to the dismal performance of the economy over the past 18 months (see graph).
However, the negative correction in consumer sentiment during the third quarter - coupled with the modest second quarter recovery in real GDP growth from its first quarter slump - has brought the CCI more in line with the weak performance of the economy.
Household budgets are increasingly being strained by rising unemployment - now at a 16-year high of 29% - slow wage growth, high tax rates, and soaring electricity prices.
While increased borrowing seems to be helping some households to maintain a reasonable quality of life amid declining real per capita incomes, consumers are clearly postponing big-ticket purchases and slashing their discretionary spending in favour of essential expenses.
“The decline in consumer confidence during the third quarter signals a further deterioration in consumers’ willingness to spend, especially among the higher income groups. Sales of new vehicles, jewellery, furniture and household appliances and other expensive luxuries are therefore expected to continue to perform poorly, while the pricing power of retailers in general will likely remain constrained during the festive season,” said Mkhwanazi.
GET READY FOR A MOODY’S DOWNGRADE NEXT YEAR
Finance Minister Tito Mboweni’s gloomy medium-term budget policy statement last week and the subsequent change in outlook from stable to negative by credit ratings agency Moody’s on South Africa’s sovereign debt are likely to have deepened further the depressed state of South African consumers.
Isaah Mhlanga, chief economist at Alexander Forbes, believes Moody’s will follow through with a credit rating downgrade to sub-investment grade next year, as economic growth is projected to remain very low, and the implementation of economic reform will be slow.
“If we were to be downgraded by Moody’s, as we expect, debt service costs would rise, the rand would marginally weaken, but the impact on inflation would be minimal. An increase in interest rates, exchange rates (depreciation) and inflation will result in higher debt service costs. While the state will be able to issue new debt and service it, it will be at a higher cost. State-owned enterprises will likely not be able to access funding from the market, meaning that the state would have to continue supporting them, which further increases the burden on the state.”
Mhlanga says an analysis of more than 20 countries that were downgraded to sub-investment grade shows that both bond yields and currencies recover over the 12 months after the downgrade.
The macroeconomic adjustment - economic growth and employment - differs depending on the policy response, he says. He believes that the South African market will probably recover over the following 12 to 18 months.
“Although markets have largely priced in a downgrade, it calls for caution in managing portfolios, particularly fixed-income portfolios which will have to bear a rise in bond yields related to World Government Bond Index outflows (which will result from South Africa falling out of the index). Remaining underweight in fixed income moving into next year’s budget and overweight in domestic equities, especially rand hedge components, is likely to be a good strategy,” Mhlanga says.