Ukraine war sets 2022 consumer confidence off on a bad start

Consumer confidence started 2022 on a low due to the war in Ukraine, as well as the associated humanitarian crisis and the economic ramifications thereof.

The decline of 4 index points for the first quarter, from -9 to -13, takes consumer confidence back to the same depressing level recorded in the second quarter of 2021.

During this period last year, the social relief of distress grant was stopped, the lethal Delta Covid-19 variant swept through the country, and lockdown restrictions were drastically tightened from level 1 to 4.

According to the FNB/BER Consumer Confidence Index (CCI), the latest reading is well below the long-run average of +2 since 1994. This signals consumers have a low willingness or increased caution to spend, despite a large drop in coronavirus infections and a welcome easing of Covid-19 regulations.

The first quarter survey was conducted by telephone calls between 21 February and 4 March 2022. The war started when Russia invaded Ukraine on 24 February and a R1.46 per litre increase in the price of petrol was announced on 26 February and came into effect on 2 March.

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Consumer confidence decline

The low consumer confidence during the first quarter could be due to marked declines in the economic outlook from -12 to -18, and household financial position from +14 to +8, which declined to levels last seen in 2020.

Although the appropriateness of the present time to buy durable goods such as vehicles, furniture, household appliances, and electronic goods, increased marginally from -30 to -28, the vast majority of consumers consider the present as an inappropriate time to buy expensive durable goods.

The different household income groups all had different results.

Surprisingly, the confidence level of high-income households that earn more than R20 000 per month declined sharply from -11 to -18, while the confidence level of middle-income households that earn between R2 500 and R20 000 per month dropped from -9 to -11.

However, low-income confidence among consumers who earn less than R2 500 per month further recovered from -9 to -6. Affluent consumers are now considerably more pessimistic about the economic outlook and their household finances than low-income households.

“The marked decline in the confidence levels of affluent consumers can largely be explained by the alarming images of Russia’s military invasion of Ukraine, unprecedented sanctions against Russia, and the unfolding economic ramifications of this conflict,” Mamello Matikinca-Ngwenya, chief economist at FNB, says.

“Soaring fuel prices and another 25 basis point increase in the prime interest rate in the first quarter may also have started to squeeze the spending power of high- and middle-income consumers.”

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Fuel prices kill consumer confidence

Fuel prices have already increased dramatically and more massive increases are on the cards for April.

In addition, soaring global wheat prices will likely spill over into higher food inflation, while economists expect another interest rate increase at the end of March, increasing the cost of living even more.

Matikinca-Ngwenya expects that less affluent households will eventually be the hardest hit by spiralling fuel and food prices, as these categories make up a proportionally larger share of their household budgets.

The extension of the R350-a-month social relief of distress grant to more than 10 million impoverished South Africans probably supported the confidence of low-income consumers.

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Short recovery

According to the index, consumer confidence recovered most of the ground lost since the outbreak of the pandemic, although it remained pessimistic at -9 during the fourth quarter of 2021. Consumer spending also rebounded.

Although the household sector extended its recovery with consumer spending on services, such as hospitality, transport, and medical services, picking up and more optimistic fiscal projections and significant easing of regulations created more positivity, Russia’s war on Ukraine and the deterioration in the global economic outlook have now triggered fresh concerns for consumers.

Apart from making consumers less likely to spend, higher inflation will also erode their purchasing power or ability to spend.”

Economic research group Oxford Economics Africa, says in response to the results of the index that it is interesting that, given how low confidence levels currently are, the shift in consumer expenditure away from retail goods and more towards services will likely be gradual.

This means tourism, restaurants, and entertainment services which were most severely affected by the pandemic, will probably continue to experience soft demand as pressures already felt at the pump will increase.

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Outlook for the rest of 2022

“Fuel prices are likely to remain elevated over the coming months. While the situation in Ukraine remains highly uncertain, claims in the media of R30 per litre to R40 per litre for petrol this year are perhaps overexaggerated.”

With Russia and Ukraine, both major producers of wheat and sunflowers, at war, local households can soon begin to see higher prices for items such as bread and cooking oil.

“We maintain the notion that consumers will feel the pressure from all sides in 2022, with inflation forecast to average 5.6% this year compared to 4.5% in 2021.”

The group also expects the South African Reserve Bank (Sarb) to increase the repo rate by 25 basis points next week, with another 75 basis points over the rest of the year.

“The Sarb will be cognisant of growing risks to South Africa’s economic outlook, but at the same time it would be difficult for the apex bank to ignore the short-term impact of higher prices.”