Consumer confidence at five-year high, but still below average

Consumer confidence was at a five-year high in the third quarter of the year, although it was still somewhat below the long-term average of the consumer confidence index that was set at zero in 1994.

However, the FNB/BER Consumer Confidence Index’s reading of -5 is the highest that confidence has been since the first half of 2019, before the global outbreak of the Covid-19 pandemic. The index jumped from -10 to -5 index points during the third quarter, recording its second consecutive 5-point increase.

Although the latest reading remains somewhat below the 10-point jump in the index over the last six months (and a 20-point increase since mid-2023) it signals a pronounced improvement in consumers’ willingness to spend and bodes well for the outlook for consumer spending for the remainder of the year.

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Uptick in consumer confidence shows marked increase in outlook for household finances

While the second-quarter increase in the index was primarily driven by a major improvement in the economic outlook sub-index on the back of no more load shedding, The BER says the third-quarter uptick can mainly be ascribed to a marked increase in the household financial outlook sub-index and a further improvement in the sub-index measuring the appropriateness of the present time to buy durable goods such as cars, furniture, household appliances and electronic goods.

The household finances sub-index also increased from 8 to 14 index points during the third quarter, the highest reading since the fourth quarter of 2021. After edging up from -30 to -28 in the second quarter, the time-to-buy durable goods sub-index improved further to a two-year high of -23 in the third quarter. The economic outlook sub-index in turn extended its 13-point second-quarter surge by another two points to reach -7 in the third quarter.

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Confidence of high and middle-income groups

A breakdown of the index per household income group shows that the third-quarter increase in overall confidence was driven by much-improved sentiment among high-income households, as well as a further uptick in middle-income confidence.

After slumping from -14 to -16 at the time of the second quarter survey conducted before the formation of the GNU, the confidence levels of high-income households earning more than R20 000 per month rebounded to a 5-year high of -6 in the third quarter.

The confidence levels of middle-income households earning between R5 000 and R20 000 per month improved to -4 during the third quarter, after leaping from -17 to -9 in the previous quarter.

Mamello Matikinca-Ngwenya, chief economist at FNB, says a confluence of positive developments bolstered the confidence levels of South Africa’s more affluent consumers over the last six months. These include:

• the formation of a government of national unity
• the absence of load-shedding
• a stronger rand exchange rate
• substantial fuel price declines
• a deceleration in inflation and
• expectations of interest rate cuts in the coming months.

“Moreover, the implementation of the two-pot retirement system on 1 September now allows consumers access to a portion of their retirement savings, which will no doubt hearten households experiencing financial distress.”

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Consumer confidence in low-income households

The confidence of low-income households earning less than R5 000 per month soared from -17 to -4 index points during the second quarter, posting the largest increase of the three income groups, but slipped back slightly to -7 during the third quarter.

Matikinca-Ngwenya says although the termination of load shedding, the deceleration in food inflation and substantial fuel price cuts would also have buoyed the confidence levels of less affluent consumers in recent months, low-income households are less likely to have pension funds and debt that is tied to the prime interest rate.

“Prospects of interest rate cuts and the implementation of the two-pot retirement system would, therefore, be less beneficial to low-income consumers.”

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Uptick is third consecutive increase in consumer confidence this year

Matikinca-Ngwenya points out that the uptick in consumer confidence during the third quarter marks the third consecutive increase in consumer sentiment this year, propelling the index from an average of -20 in 2023 to a 5-year high of -5.

“This signals a striking improvement in consumers’ willingness to spend. At the same time, the deceleration in inflation from 6% in 2023 to 4.6% by July 2024, the introduction of the two-pot retirement system and a strong likelihood of an interest rate cut by the end of September will bolster real disposable income and therefore the ability of consumers to spend.

“This bodes well for the outlook for real consumer spending during the remaining months of the year, with durable goods consumption, in particular, standing to benefit from the rise in confidence especially among affluent consumers, the implementation of the two-pot retirement system and expected interest rate cuts.”

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More confidence and more money means higher demand

Jee-A van der Linde, senior economist at Oxford Economics Africa, agrees that the increase in consumer confidence indicates a higher propensity to spend and portends stronger consumer demand in the second half of the year.

“Cooling inflation, lower fuel prices and retirement fund reforms should support this. Interest rate cuts by the South African Reserve Bank would provide an added boost to the economy. However, it is worth pointing out that although consumers have become less pessimistic about the South African economy and their financial positions in recent quarters, sentiment under ‘GNU-phoria’ appears to be much more muted than during the upsurge seen during ‘Ramaphoria’ in 2018.

“Consumers are likely alive to the political dynamics of the GNU, while economic realities continue to bite more than five years later following virtually no economic growth and higher unemployment. Over the coming quarters, we should expect a more gradual increase in the index, although it remains to be seen whether this improvement can be sustained.”