Consumers still optimistic about finances despite challenges

South Africans are still optimistic about their finances despite higher-than-expected inflation, the risk of yet more interest rate hikes and soaring food and fuel prices.

According to TransUnion’s Consumer Pulse Study for the fourth quarter of the year, 74% of households observed expect an increase in their income over the next 12 months and only 6% expect a decrease, despite the somewhat different reality over the last quarter when only 34% of households reported actual increased incomes and almost a quarter (22%) reported a decline.

Lee Naik, CEO of TransUnion Africa, says this optimism about their finances suggests that there is potential for recovery and growth: “Under a magnifying glass, the interplay between consumer income, spending and debt shows consumers’ determination to improve long-term financial well-being by cutting non-essential spending to save more and reduce existing debt levels.”

The report indicates that consumers adapted their budget strategies over the past three months, with 29% paying down their existing debts faster, 25% saving more in emergency funds or stokvels and 18% saving more for retirement.

While economic headwinds batter disposable incomes, nearly half (47%) of consumers said they will cut down on eating out, travel and entertainment and spend less on retail shopping and big purchases in the next three months.

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Consumers are all about affordability

South Africa’s retail trade rose by 0.9% from a year earlier in September 2023, following a downwardly revised 0.3% decrease in the month before and better than market forecasts of a 0.1% increase. Retailers hope for a further recovery in spending during the festive season but, with the cost of goods increasing by 5.4%, consumers keep affordability top of mind.

Consumers’ optimism over future earnings is also tempered by the rising cost of credit commitments as part of their finances. Naik says with the prime lending rate at 11.75%, a significant increase from 10.5% in the fourth quarter of 2022, only 59% of households expect to be able to meet their current bills and loan obligations.

However, in a demonstration of proactive debt management, 34% of respondents will dip into their savings to service their debt in the short-term, while 31% plan to make at least partial payments within their means.

A larger proportion of Gen Z (born 1995-2004) and millennial (born 1981-1996) respondents indicated that they were struggling. While 34% of Gen Z respondents and 42% of millennials said they will not be able to meet their credit commitments in the coming quarter, 44% of Gen Z and 40% of millennials intend to increase contributions to their retirement savings and 35% of Gen Z and 40% of millennials are prepared to curtail large purchases to do so.

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Consumers’ attitudes to credit

Consumers ‘attitudes to credit remained largely unchanged from the third quarter, although 92% of consumers (marginally up from 90% in the third quarter) believe that access to credit is essential for financial inclusion and economic participation.

However, only one in three intends to apply for new credit, or refinance existing credit, in the next year. Within this segment, 29% are interested in a credit card and 31% in a personal loan.

During the fourth quarter only half of the consumers (50%) who considered taking out credit applied. The rest were deterred by the high cost of new credit (33%), or they feared rejection due to their income or employment status (24%). Another 24% tapped an alternative funding source.

Naik points out that access is also regarded as an impediment to borrowing, with 38% of respondents saying they do not have sufficient access to credit. “This shows a need for bureaus to include alternative data, like mobile data in credit scoring. It will also be interesting to see the effect of including overdraft facilities in credit scoring, which is in the implementation stages.”

Half of the surveyed consumers (50%) believe their credit scores will improve if alternative data was included. Consumers also agreed that monitoring their credit reports is very important (31%), if not extremely important (35%), with 67% saying they check their credit reports at least every quarter.