GNU talks: Consumer confidence remains in limbo

It seems that consumer confidence continues to mend, although it is currently stuck in limbo, as talks about the GNU continue.

The FNB/BER Consumer Confidence Index edged up further to -12 in the second quarter of 2024, after improving from -17 to -15 index points in the first quarter of 2024.

The second quarter survey was conducted between 3 and 14 June, after the results from the national election were declared, but before the configuration of the government of national unity (GNU) was finalised.

The outcome of the talks will feed into future confidence levels.

At -12, well below the long-term average reading of zero for the Index since 1994, consumer sentiment remained decidedly negative in the second quarter, with some consumers probably still quite uncertain about which parties would join the GNU, the BER says.

Nevertheless, the BER points out, the latest consumer confidence reading is the highest in 18 months. The Index reached -8 in the fourth quarter of 2022. The latest reading points to a gradual improvement in consumer spending compared to the very weak performance recorded over the last year.

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Slight increase in economic outlook

The increase in the Index during the second quarter can be ascribed to a further improvement in the economic outlook sub-index of the Index and a slight increase in the sub-index measuring the appropriateness of the present time to buy durable goods such as vehicles, furniture, household appliances and electronic goods.

Having bounced back from -28 to -22 in the first quarter, the economic outlook sub-index extended its gains to reach -16 in the second quarter, the highest economic outlook reading since the fourth quarter of 2021.

Following a slump from -25 to -30 in the first quarter, the time-to-buy durable goods sub-index posted a partial recovery to -28 in the second quarter.

The household finances sub-index of the CCI remained steady at 8 during the second quarter, after three consecutive upticks from -2 in the second quarter of last year.

A breakdown of the Index per household income group shows a slight improvement in overall confidence, driven by an uptick in the confidence levels of middle and low-income households.

The confidence levels of middle-income households, earning between R5 000 and R20 000 per month, jumped from -17 index points to -10. While the confidence of low-income households, earning less than R5 000 per month, improved from -16 to -10.

However, the BER says, the confidence levels of high-income households that earn more than R20 000 per month, remained unchanged at -14 during the second quarter.

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Good news in second quarter buoyed consumer confidence

Mamello Matikinca-Ngwenya, chief economist at FNB, says positive developments, such as the cessation of load shedding during the second quarter, substantial cuts in fuel prices in June, a R20 increase in the SRD grant from April, and a significant deceleration in food inflation likely buoyed confidence levels, particularly among low and middle-income consumers.

“However, high interest rates and uncertainty over which parties would form part of South Africa’s government of national unity probably kept the lid on high-income confidence.

Provided that the GNU remains intact and the JSE and rand exchange rate hold onto their recent gains, there is scope for improvement in high-income confidence during the third quarter.”

She points out that real growth in consumer spending sorely disappointed over the last year, with a 0.4% year-on-year contraction in the first quarter of 2024.

“The gradual improvement in consumer sentiment, coupled with lower inflation, should boost real household consumption in the coming months.

“However, with the prime interest rate still at a 15-year high of 11.75%, consumers continue to shy away from big-ticket durable goods, as indicated by the 11.7% contraction in new passenger car sales in May 2024 compared to a year ago.”

Matikinca-Ngwenya says should the positive sentiment towards South Africa hold after the formation of the GNU, the stronger rand exchange rate will allow for lower import prices and provide scope for the South African Reserve Bank (Sarb) to cut the prime interest rate in September and ignite a stronger recovery in consumer spending towards the final quarter of 2024.

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Middle- and low-income households show more consumer confidence

Jacques Nel, head of Africa Macro at Oxford Economics Africa, says the latest improvement in consumer confidence can be attributed to another uptick in the economic outlook sub-index, as well as a slight increase in the sub-index measuring the appropriateness of the present time to buy durable goods.

“The economic outlook sub-index came in at -16, which is the highest since the fourth quarter of 2021. The time-to-buy durable goods sub-index edged higher to -28 from -30 the previous quarter. The household finances sub-index remained steady at 8.”

He says looking at confidence levels by income group, the slight improvement in overall confidence was driven by a notable uptick in the confidence levels of middle and low-income households.

“With confidence levels among high-income households who earn more than R20 000 per month remaining unchanged at -14, it means high-income households have gone from the least pessimistic to the most pessimistic.”

This chart shows how consumer confidence improved marginally in recent quarters:

Source: BER

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A lot riding on GNU outcome

Nel said a lot is riding on the outcome of GNU discussions.

“A favourable outcome means the Rand could hold on to recent gains, providing a disinflationary impulse and potentially bringing interest rate cuts forward. This, together with the dissipation of uncertainty regarding negotiations, will positively impact consumer confidence going forward.”