Consumer confidence recovers some lost ground, but still negative

Consumer confidence recovered some lost ground during the third quarter but is still negative at -16 after nosediving from -8 index points during the fourth quarter of 2022 to -25 by the second quarter of 2023.

The FNB/BER Consumer Confidence Index (CCI) combines the results of three questions posed to South African adults about the expected performance of the economy, the expected financial position of households and the appropriateness of the present time to buy durable goods, such as furniture, appliances and electronic equipment.

The reading of -25 recorded during the second quarter was the second lowest since 1994, with -36, logged during the hard Covid-19 lockdown in the second quarter of 2020, the historical low for the index.

“Despite the 9-index point rebound in the third quarter, the latest reading of -16 remains well below the long-run average reading of zero since 1994, signalling a low willingness to spend among consumers,” the BER says.

The recovery in the index during the third quarter can largely be attributed to a strong rebound in the economic outlook sub-index and an improvement in the time-to-buy durable goods sub-index.

The economic outlook sub-index jumped by 15 index points to -22, while the index measuring the appropriateness of the present time to buy durable goods improved by 9 index points to -26. However, the household financial outlook sub-index only ticked up by 1 index point to -1.

All three sub-indices remain well below their long-term average readings, and consumers remain more concerned about the national economy outlook than their own household finances.

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More consumer confidence among high-income consumers

There was also a remarkable rebound in the confidence levels of high-income households earning more than R20 000 per month after an outsized decline during the first half of 2023. Spooked by a dramatic escalation in load shedding, a sharp depreciation in the rand exchange rate, successive interest rate hikes and the diplomatic fallout following the docking of a Russian ship in Simon’s Town, affluent consumers became particularly alarmed about South Africa’s economic prospects.

High-income confidence plunged to an all-time low of -40 in the second quarter of 2023 but rebounded to -17 in the third quarter. The confidence levels of middle-income households, earning between R5 000 and R20 000 per month, also improved, from -22 to -15.

The confidence of low-income households earning less than R5 000 per month remained unchanged at -16 index points. While high-income households were considerably more pessimistic than low- and middle-income households during the first half of 2023, the confidence levels of all three income groups are once again at similar, relatively depressed levels.

“While the financial pulse of the nation remains weak, there appears to be some light at the end of the tunnel for consumers. The inflation rate cooled from 7.1% in March to 4.7% in July, fuelling hopes that the South African Reserve Bank has reached the end of its interest rate hiking cycle,” Mamello Matikinca-Ngwenya, chief economist at FNB, says.

“Combined with a sustained recovery in employment, with another 154 000 jobs added during the second quarter, lower inflation should bolster consumers’ buying power somewhat towards the end of 2023.”

Matikinca-Ngwenya says an unexpected and noticeable easing in load shedding during the survey period, coupled with household’s reduced dependency on Eskom thanks to alternative power supply sources and diminishing concerns around South Africa’s diplomatic relations with the West, also heartened consumers.

These positive developments seemed to outweigh the impact of confidence-sapping events, such as the torching of multiple trucks on the N3 transport corridor in July, the damaging week-long taxi strike in the Western Cape during August and the ongoing municipal worker strike in Tshwane.

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Now consumers want to spend, but cannot afford to

“Although the rebound in consumer confidence is good news in terms of consumers’ willingness to spend, households’ ability to spend probably did not improve to the same extent during the third quarter,” Matikinca-Ngwenya warns.

“In fact, consumer sentiment about the outlook for their household finances has remained relatively unchanged at sub-par levels during the first three quarters. Therefore, it is unlikely that real consumer spending growth, particularly on interest-rate sensitive goods and discretionary goods and services, will accelerate meaningfully during the third quarter.”

However, Matikinca-Ngwenya says a sustained moderation in inflation, especially in food prices, should start to relieve some of the pressure on retail sales volumes from the fourth quarter, with projected interest rate cuts providing greater impetus to consumer spending by mid-2024.

Economic research group Oxford Economics Africa says persistent load shedding and challenging economic conditions amid high interest rates and cost pressures kept a lid on confidence levels. The improvement in South African business confidence was negligible, with the index stuck below the neutral 50 threshold since the second quarter of 2021.

“The weak rand exchange rate, together with South Africa’s diplomatic relations with the rest of the world and its possible impact on trade relations, remains a concern for businesses already contending with load shedding curtailing production capacity and future expansion as well as increased costs, which ultimately erode profitability,” Jee-A van der Linde, senior economist at Oxford Economics Africa, says.

The uncertain economic outlook saps consumer sentiment. All three sub-indices remain well below their long-term average readings, with consumers more concerned about the outlook for the domestic economy than their own household finances.

“South African consumers are experiencing strain due to elevated prices and high interest rates. Household consumption expenditure contracted in the second quarter, and we expect this trend to persist in the second half of the year.”