After plunging from -5 index points in 3Q2015 to -14 in 4Q2015, the FNB/BER Consumer Confidence Index (CCI) recovered some lost ground to -9 in 1Q2016.
However, the latest index number is still well below the long-term average reading of +5 for the CCI, and remains lower than to the lowest reading recorded during the 2008/09 recession (-6). This signals that consumer confidence remains depressed.
The slight improvement in consumer confidence during 1Q2016 was due to the resilience in consumers’ rating of their own financial positions and an improvement in the rating of the economic outlook from record lows. The financial position sub-index of the CCI improved by 6 index points to +10, while the economic outlook index rebounded by 10 index points from a 22-year low of -24 to -14. However, the time to buy durable goods index declined (further) by 1 index point to a 6½-year low of -22. In short, most consumers still believe that South Africa’s economic prospects will deteriorate further over the next year and that it is not a good time to buy durable goods, but a small majority is hopeful that their own household finances will improve.
The resilience in the rating of financial positions is driven largely by higher income households. In fact, over the last five years – a period characterised by generally low consumer confidence – high income households have been the most confident. This has mainly been due to high income households persistently reporting the highest levels of confidence in their personal financial prospects, even though their rating of South Africa’s economic prospects has been low. By contrast, low income households have recorded the lowest levels of overall confidence and the lowest levels of confidence with respect to the outlook for the economy and their own finances. This points to pervasive income inequality.
According to Sizwe Nxedlana, chief economist of FNB, the South African economy is in the grip of stagflation. Real economic growth deteriorated to a mere 0.3% year-on-year during 4Q2015, while the CPI inflation rate increased from 4.6% in September 2015 to 7% in February 2016. “To be sure, adverse developments such as the slump in international commodity prices and political turmoil, low business confidence levels, a severe drought, soaring food prices and rising interest rates continue to weigh down domestic economic growth and job creation prospects. However, there have also been some positive developments in recent months which help to explain the improvement in consumer sentiment regarding the outlook for the SA economy and household finances. These include the (supposed) end of load-shedding, an 87 cents drop in the petrol price between October 2015 and March 2016 and the respite in student protests over tuition fees that weighed heavily on consumer confidence levels during 4Q2015,” said Nxedlana.
Nxedlana pointed out that “The reappointment of Pravin Gordhan as the Finance Minister, followed by a well-crafted February national budget, prevented consumer sentiment from deteriorating further.” Compared to the 1.0 percentage point increase in the marginal income tax rate for all individuals earning more than R181 900 per year announced last year – and expectations of further significant tax hikes in 2016 – the partial fiscal drag relief announced in the 2016 national budget may have heartened some taxpayers. In fact, whereas the financial position sub-index of the CCI for the lowest income group (that falls below the tax threshold and would not have been affected by the tax proposals in the February 2016 budget) improved by only 1 index point during 1Q2016, the financial position sub-indices for the middle and high income groups improved by between 5 and 11 index points during 1Q2016.
The recovery in the JSE All share index (from around 47 000 index points in mid-January to 53 000 during mid-March) and the appreciation in the rand exchange rate against the US dollar (from roughly R/$ 16.80 in mid-January to closer to R/$ 15 in March) may also have bolstered the confidence levels of high income consumers.
In contrast, the time to buy durable goods sub-index of the CCI slumped to -22 index points during 1Q2016 – the lowest level since the 2008/09 recession (-23 in 3Q2009). Nxedlana noted that “With interest rate hikes announced in the last three consecutive SARB Monetary Policy Committee meetings (November, January and March), the prime interest rate has increased by a full percentage point over the last four and a half months. Coupled with great uncertainty about South Africa’s economic prospects in the medium term, higher debt financing costs in all likelihood persuaded many consumers to postpone their durable goods purchases.” This is reflected in the sharp contraction in new vehicle sales over the last year, which declined by 5.7% in 2015 and another 8.5% year-on-year during 1Q2016.
Despite the slight recovery in the CCI, consumer confidence remains exceedingly depressed, pointing to a low willingness to spend and utilise credit among households. Indeed, consumer confidence levels remained in negative territory across all income and race groups during 1Q2016. In addition, in the weeks after the fieldwork for the first quarter survey was completed (i.e. after 22 March), the petrol price was hiked by 83 cents and the JSE All Share index lost significant ground again. Furthermore, food prices are set to rise much more on the back of the devastating drought, which will adversely affect the purchasing power of low and middle income households in particular. “Given that the heydays of easy access to unsecured credit, extraordinarily low interest rates and strong growth in public sector employment and wages are now behind us, we expect the growth in real consumer spending to slow further during 2016,” said Nxedlana.