Having plunged from -8 to -23 index points during the first quarter of 2023, the FNB/BER Consumer Confidence Index (CCI) sagged further to -25 index points during the second quarter of 2023.

Consumer Confidence Index sags further

The CCI has varied between a low of -36 (recorded during the hard COVID-19 lockdown in 2020Q2) and a high of +26 (when Cyril Ramaphosa was elected as the country’s president in 2018Q1), with an average reading of zero since 1994. The latest reading of -25 is the second-lowest CCI reading on record since 1994 and indicative of tremendous concern among consumers about South Africa’s economic prospects and their household finances.

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Consumer confidence has now dropped back to the same low level that was recorded during the second quarter of 2022 when the economic ramifications of the Ukrainian war – including soaring fuel and food prices, higher interest rates and slumping share prices on the JSE – became clear.

Details

All three sub-indices of the CCI slipped back further during the second quarter of 2023. The economic outlook sub-index of the CCI dropped by 3 index points to -37, while the time-to-buy durable goods index eased by a further point to -35. Both of these indices are now deeply negative, suggesting that the vast majority of consumers expect a deterioration in South Africa’s economic growth over the next 12 months and consider the present time as highly inappropriate to purchase durable goods (e.g. vehicles, furniture, household appliances and electronic goods). The household financial outlook sub-index of the CCI eased further from -1 to -2 index points during the second quarter and is now also well below the average reading of +11 for this sub-index. In all, consumers appear to be far more pessimistic about the outlook for the national economy compared to their household finances.[2]

Source: BER

A more detailed breakdown of the CCI shows that, for the second consecutive quarter, the confidence levels of high-income households (earning more than R20 000 per month) deteriorated the most, falling from -31 to a new historic low of -40. Affluent consumers are not only highly alarmed about the outlook for the SA economy, but they now also fear that their household finances will worsen over the next 12 months.

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They are also the most pessimistic of all income groups about the appropriateness of the present time to buy durable goods. The confidence levels of middle-income households (earning between R5 000 and R20 000 p.m.) weakened slightly from -21 to -22, while low-income confidence (earning less than R5 000 p.m.) edged up marginally from -17 to  -16 index points. High-income confidence levels are now far lower compared to low- and middle-income confidence, and even below the extraordinarily depressed levels attained during the height of the COVID-19 pandemic.

Chief Economist Mamello Matikinca-Ngwenya

FNB Chief Economist Mamello Matikinca-Ngwenya said that “Further interest rate hikes, rand depreciation and concerns about South Africa’s diplomatic relations with the rest of the world in all likelihood compounded the negative impact of the electricity crisis on high-income confidence. Affluent consumers are more likely to have invested – at great expense – in alternative electricity sources such as solar or battery power and are also more inclined to have debt that is tied to the soaring prime interest rate (e.g., home loans, as opposed to unsecured debt). With the prime interest rate having increased by 475 basis points over the last 2 years, debt servicing costs are really starting to bite. The weaker rand exchange rate is also putting upward pressure on the cost of overseas travel and imported goods such as new vehicles, typically purchased by affluent consumers. Load-shedding and sustained high food inflation are likely of primary concern to low- and middle-income households, but sharply lower paraffin prices and the extension of the jobs recovery in the services sector may be cushioning the impact on less affluent consumers.”

Bottom line

The further deterioration in the confidence levels of high-income consumers does not bode well for the retail sector, as affluent consumers have the greatest spending power among the different income groups. The sales volumes of expensive durable goods such as new vehicles, jewellery, furniture and household appliances – and potentially even semi-durable goods such as clothing and footwear – are likely to deteriorate as high-interest rates and costly investment in alternative power supply sources continue to erode the spending power of high-income households. While low- and middle-income households are also quite despondent, relatively steady confidence levels among these income groups in the second quarter point to some resilience among less affluent households. The incomplete post-COVID employment recovery and projected deceleration in inflation (especially on the food price front) should prevent an outright collapse in real consumer spending during the second half of 2023 amidst extraordinarily depressed consumer sentiment.

Background

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. 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. Internationally, the majority of CCIs is based on telephone call surveys.

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 on 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.

This article was compiled by the FNB Media Team.