This is what makes consumers financially vulnerable – survey

South African consumers are still financially vulnerable and continuous load shedding posed the greatest risk to their finances in the third quarter, while political instability and corruption were deemed a higher risk than continued cyclical factors, such as high food and fuel prices and rising interest rates.

According to the Momentum/Unisa Consumer Financial Vulnerability Index for the third quarter, load shedding and political instability as well as corruption increased in importance compared to high food and fuel prices in the third quarter. The risks also include the well-known triad of unemployment, poverty and inequality.

The index is based on research conducted by the Bureau of Market Research at Unisa on behalf of Momentum and the results are based on the responses of 100 key informants from relevant industries who can gauge consumers’ financial perceptions and positions. It aims to provide information and strategies on how South Africans can accelerate their journey to financial success.

During the third quarter the index increased to 50.9 points from 49.3 points in the second quarter, mainly due to a more upbeat cyclical economic environment, driven by an encouraging inflation rate, interest rate and income earning developments. It was 49.7 a year ago.

Inflation declined to 5% in the third quarter and the Monetary Policy Committee (MPC) of the South African Reserve Bank (Sarb) left interest rates unchanged, while expected salary increases was higher compared to the previous quarter.

However, a prolonged recovery in the index to above 60 points, where financial security starts to dominate financial vulnerability, will only become likely when these risks and other structural factors are addressed, the researchers say.

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Majority still worry about their finances though they are less financially vulnerable

The index shows that though consumers were in general a bit less vulnerable, the majority still worry about their financial situation and this negatively affected their mental bandwidth and therefore their relationships with family and friends.

“Nevertheless, there was an increase in feel-good purchases, possibly driven by consumers whose income improved sufficiently to afford it.”

The slight improvement in consumer vulnerability occurred in all four subcomponents of the index, with an improvement in the income index to 52.0 points from 49.9 points in the previous quarter, while the expenditure vulnerability index rose slightly to 52.9 points from 52.3. Although the saving and debt servicing indices also improved, they were still below 50 points.

The researchers say the improvement was driven by an increase in consumers’ access to an income via employment and transfers from family and friends that had a positive domino effect on the other three subcomponents.

“Although consumers still limited their purchases, the better income combined with lower inflation contributed to an improvement in the expenditure index as they were more able to afford their expenses. Likewise, combined with stable interest rates, the higher income improved consumers’ ability to service their debt, although they were still vulnerable in this department.”

Consumers’ improved access to more income, combined with being better able to afford expenses and debt service costs, created room for saving for emergencies, but they were not yet in a position to contribute more to retirement savings, causing the saving index to remain below 50 points.

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Consumers making plans to combat being financially vulnerable

Consumers were in general more cautious and did less impulsive buying compared to both the second quarter as well as the third quarter of 2022, but the majority still despaired about their financial situation and constantly made plans to solve their problems although this consumed most of their available mental bandwidth, negatively affecting other parts of their life such as productivity and their relationships with family and friends.

Mental bandwidth refers to the cognitive capacity or mental resources a person has available for processing information, making decisions and engaging in various mental tasks. This is reflected in the fact that 56.9% of the key informants stated that consumers were more cautious and did less impulsive buying.

In addition, 62.9% stated that consumers bought things to make them feel good although they did not really need them or had money, while 73.7% stated that consumers were constantly thinking about their finances.

The researchers say the descending order of risk posed by high food and fuel prices and rising interest rates accrued from a somewhat better economic environment in the third quarter. While food price inflation averaged 12.5% in the second quarter compared to a year ago, it declined to around 9% in the third quarter.

Similarly, although the petrol price was on average 1.1% higher in the third quarter compared to the second quarter, it was 7.6% lower compared to a year ago and while the repo rate was raised by 25 basis points in the second quarter, it remained unchanged in the third quarter, 200 basis points higher than a year ago.

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Political instability and corruption

The researchers also noted that although the risk of political instability and corruption moved down to the fourth highest risk, this should be viewed in context.

“It is a relative issue with its risk measurement at the exact same level as in the previous quarter, but other factors are expected to become even higher risks in the fourth quarter.”

The economic and personal finance outlook for the fourth quarter was mixed. Consumer key informants are still overwhelmingly negative, but their outlook for inflation and consumer finances improved compared to what it was for the third quarter, while they were most negative on the global economic outlook:

• 77.4% expect consumer finances to remain at the current vulnerable level or worsen.
• 62.9% anticipate general prices to increase at the same rate or a slightly slower pace.
• Around 82% expect the global and domestic economic situation to remain the same or worsen.
• 78.1% foresee unchanged or worsening unemployment.
• 62.9% expect that there will be a continued increase in prices.
• 81.7% expect that the South African economic situation will remain the same or deteriorate.