Consumer confidence deteriorates dramatically as economic outlook sours

Consumer confidence has deteriorated dramatically as the economic outlook sours, signalling a marked slowdown in consumer spending in the coming months.

Notable though is even high-income consumers’ confidence is seeing a sharper decline than that of low-income South Africans since the end of 2021.

After already slipping from -9 to -13 index points during the first quarter of 2022, the FNB/BER Consumer Confidence Index (CCI) plunged to -25 in the second quarter of 2022.

Apart from the index reading of -33 in the second quarter of 2020, when the sudden outbreak of the pandemic and implementation of level 5 lockdown decreased sentiment, the new reading is the lowest in more than 3 decades.

Official data indicates that growth in real consumer spending remained robust at 3.2% year-on-year during the first quarter of 2022, but this is about to change as consumers will spend less in coming months.

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Remarkable collapse in consumer confidence

The Bureau for Economic Research (BER) says the remarkable collapse of consumer confidence can be ascribed to a major deterioration in the economic outlook (from -18 to -39) and a complete turnabout in the household financial prospects (from +8 to -5).

The index measuring if it is a good time to buy durable goods, such as vehicles, furniture, household appliances and electronic goods, also decreased from -28 to -32, indicating that consumers consider the present as an inappropriate time to buy durable goods.

High-income consumer confidence already slumped from -11 to -18 index points in the first quarter and now the confidence level of high-income households, earning more than R20 000 per month, crashed to -30 in the second quarter, only 3 index points from the historic low of -33 recorded in the second quarter of 2020.

It is clear that the vast majority of affluent households now anticipate that their household finances and the country’s economic growth rate will deteriorate.

The confidence level of middle-income households, earning between R2 500 and R20 000 per month, also decreased by -11 to -23, while the confidence of low-income consumers, who earn less than R2 500 per month, declined from -6 to -16 index points.

Although consumer sentiment is now very depressed across all three income groups, affluent consumers are considerably more downbeat compared to low-income households, the BER points out.

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War, fuel prices, inflation and repo rate hammers consumer confidence

“The economic ramifications of Russia’s war in Ukraine dealt hammer blows to consumer confidence around the globe and South Africa is no exception. Domestically, petrol prices have soared by R4,60 per litre (nearly 25%) since January, the consumer price inflation rate breached the 6% upper range of the Reserve Bank’s target for the first time in 5 years and the prime interest rate has been hiked by 75 basis points since the start of the year,” says Mamello Matikinca-Ngwenya, chief economist at FNB.

“While spiralling food and fuel prices are probably the main concern for less affluent households, the prospects of further steep interest rate hikes and sinking share prices on the JSE would have compounded the inflationary pressures when it comes to middle- and high-income households.”

Mamello Matikinca-Ngwenya says non-payment of the R350 per month social relief of distress (SRD) grant to 10.6 million South Africans in April and May probably also weighed on the confidence levels of many low-income households.

“However, a substantial improvement in job creation in recent months and Sassa’s commitment to resume the SRD grant payments at the end of June probably prevented an even more pronounced decline in low-income consumer confidence during the second quarter.”

The BER says although consumer sentiment was expected to weaken further due to a worsening inflation and interest rate outlook, the extent of the drop in consumer confidence is alarming. “Save for the panicked level 5 lockdown period during the initial outbreak of the COVID pandemic in SA, the index is now at its lowest level in 35 years.”

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Household consumption slows down significantly

Household consumption expenditure still surprised on the upside in the first quarter, but the dramatic deterioration in confidence points to a sudden slump in consumers’ willingness to spend, which foreshadows a significant slowdown in real consumer spending growth relative to the strong first quarter.

Although consumers are likely to tighten their purse strings, the BER says the surprisingly large fall in consumer confidence could signify an overreaction to recent developments and may not translate into an equally large contraction in consumer spending.

Matikinca-Ngwenya says positive developments, such as the scrapping of all remaining pandemic regulations, could result in a gradual recovery in job creation, while the back payment of missed SRD grants could counter some of the mounting inflationary and interest rate pressures.

Affluent consumers’ savings over the last two years should also support spending by high-income households, but the combination of soaring food and fuel prices as well as increased wariness among consumers will no doubt see a realignment of consumer budgets, Matikinca-Ngwenya says.

It is likely that households will start to draw on savings and slash their discretionary spending, especially on big-ticket durable goods, to buffer buying basic necessities and support the recovery in spending on clothing, restaurants, recreation and entertainment.

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What consumer confidence surveys show

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.

A low level of confidence indicates that consumers are concerned about the future and are worried about job security, salary increases and bonuses. They then tend to cut spending to only include basic necessities to be able to pay their debts.

If confidence is high, consumers tend to incur debt or reduce savings and spend more on discretionary items, such as furniture, household equipment, motor vehicles, clothing and footwear, which 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, the BER says.