Consumer confidence recovers some lost ground - FNB
Consumer sentiment recovered somewhat during the third quarter of 2020 following the shocking decline triggered by the Covid-19 pandemic and concomitant economic lockdowns in the second quarter. After crashing from -9 index points to a 35-year low of -33 in the second quarter, the FNB/BER Consumer Confidence Index (CCI) edged up to -23 during the third quarter. Bar the second quarter low of -33, the latest CCI reading remains the lowest on record since the first quarter of 1993 - a recessionary period of great uncertainty just before South Africa's first democratic election.
The third quarter CCI survey was conducted by means of a telephone call survey between 11 and 21 August 2020. On 15 August, President Ramaphosa announced that the country would move from level 3 to level 2 of the risk-adjusted strategy, reopening South Africa's provincial borders for leisure travel, lifting the bans on the sale of alcohol and tobacco products and permitting visits to family and friends in small groups.
The partial recovery in the CCI during the third quarter of 2020 can be ascribed to increases in the household finances and time-to-buy durable goods sub-indices of the CCI, following major drops in the second quarter. The household financial outlook sub-index of the CCI edged up from -13 to -2 index points, but remained well below the first quarter reading of +14. Similarly, the sub-index measuring the appropriateness of the present time to buy durable goods (e.g. vehicles, furniture, household appliances and electronic goods) improved from the historic low of -64 reached in the second quarter to -44 in the third quarter. Disappointingly though, the latest reading of -44 is still deeply depressed and even slightly below the previous record low of -42 (reached in 1984).
The economic outlook index, which saw a comparatively smaller decline in the second quarter (from -16 to -21), deteriorated further in the third quarter (to -23).
A breakdown of the CCI per household income group shows that confidence levels improved somewhat across the board. After posting the largest fall of all income groups in the second quarter (from +2 to -35), low income confidence also recovered the most (by 15 index points to -20) in the third quarter. High- and middle-income confidence improved by 8 and 5 index points respectively. Despite these improvements, consumer sentiment across all income groups is still very much depressed.
FNB Chief Economist Mamello Matikinca-Ngwenya said that, "The gradual lifting of restrictions and the resumption of economic activity as South Africa moved from level 4 of the risk-adjusted strategy in May to level 3 in June and level 2 in August have finally allowed most consumers to go back to work and earn a living. Low-income consumers who were largely unable to work from home would have been particularly relieved by this development. The improvement in the disbursement of social grants after initial glitches likely also bolstered the financial positions of low-income households, leading to a partial recovery in confidence levels. Finally, the cumulative 300 basis point cut in the prime interest rate so far this year significantly reduced the cost of credit and would have alleviated some of the budgetary pressures of indebted households."
Matikinca-Ngwenya pointed out that, although the third quarter also saw the time-to-buy durable goods index regain some lost ground, the vast majority of consumers nevertheless still consider the present time as highly inappropriate to purchase big-ticket items such as passenger cars, household furniture and jewellery. Further testimony to this is the fact that domestic passenger car sales were still 32.6% lower in August 2020 compared to August 2019, despite the sector being fully operational since June 2020.
It is interesting to note that consumers are (again) less pessimistic about the outlook for their own household finances in 12 months' time (-2 index points) compared to their glum expectations for the national economy (-23). A number of factors may be underpinning the household finances sub-index of the CCI, including the considerable increase in social grants expenditure by the government and TERS payments to workers who lost their income due to the COVID-19 crisis and lockdown measures. Furthermore, given the forward-looking nature of the index, employees who have been unable to work (e.g. in the liquor and tobacco retailing sectors) or who have had to work reduced hours (e.g. in the restaurant, tourism and transport industries) may be expecting a substantial improvement in their salaries and wages in coming months. Unfortunately, there is significant risk that household finances in general could rebound by less, or take longer to recover, than consumers currently anticipate. Not only are the COVID-19 social grant top-ups and the new social relief of distress grant set to expire in October, but job losses are projected to rise further over the next 6 months. Furthermore, hours worked, overtime, commissions and bonuses may well disappoint amidst weak economic growth.
To be sure, the significant slowdown in the rate of new Covid-19 infections in SA, the further easing of restrictions on economic activity and the partial recovery in consumer confidence are all good for the South African economy. However, the fact that the CCI regained only 10 index points following its 35-point plunge reinforces our view that the Covid-19 pandemic and related economic restrictions delivered a profound blow to consumers' willingness and ability to spend - and it may take years for consumer confidence and household income to recover fully.
Matikinca-Ngwenya said that, "When household income is under pressure and consumer confidence is low, households tend to slash their spending on expensive luxuries. We therefore expect retail sales of durable and semi-durable goods such as new vehicles, high-end furniture and household appliances, jewellery and designer clothing and footwear to remain under intense pressure in the foreseeable future. In contrast, the marked increase in financial aid to low income households, substitution away from discretionary spending and the lifting of the ban on the sale of alcohol and tobacco products should support retail sales of non-durable goods, such as food, beverages, other groceries, cigarettes, pharmaceuticals and toiletries in the near-term."
Consumer confidence surveys provide regular assessments of consumer attitudes and expectations and are used to evaluate economic trends and prospects. The surveys are designed to explore why changes in consumer expectations occur and how these changes influence consumer spending and saving decisions.
The FNB/BER CCI combines the results of three questions posed to adults in South Africa, namely 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 electronic equipment.
Until the second quarter of 2019, the FNB/BER CCI was based on face-to-face interviews of between 2 000 and 2 500 urban adults. Due to weak demand, the three service providers in South Africa - Nielsen, Ipsos Markinor and TNS Kantar – could not always guarantee surveys with a quarterly frequency between 2016 and 2019. Internationally, the majority of CCIs are based on telephone call surveys. As a result, the BER switched to telephone call surveys in the third quarter of 2019. The 500 respondents are representative of the racial and household income composition of the urban adult population of South Africa.
Consumer confidence is expressed as a net balance. The net balance is derived as the percentage of respondents expecting an improvement / good time to buy durable goods less the percentage expecting a deterioration / bad time to buy durable goods.
A low level of confidence indicates that consumers are concerned about the future. They may be worried about job security, pay raises and bonuses. With such a frame of mind, consumers tend to cut spending to basic necessities (e.g. food and services) to free up income for debt repayment. If confidence is high, consumers tend to incur debt (or reduce savings) and increase spending on discretionary items, such as furniture, household equipment, motor vehicles, clothing and footwear. Some of these items are often financed on credit. Spending on these items declines when confidence is low, as households can generally delay their purchase without experiencing an immediate deterioration in living conditions.
A rise in consumer confidence reflects an increased willingness of consumers to spend. However, this willingness only translates into actual sales if consumers’ ability to spend improves. Their ability to spend depends on their inflation adjusted after-tax income and the availability of credit. A rise in consumer confidence could therefore result in an upturn in household consumption spending in general and retail and motor vehicle sales in particular. The opposite applies when the level of consumer confidence declines.