SA’s middle class not as confident as the poor and the rich in Q3

South African consumers have shown themselves to be resilient in the third quarter despite the riots that swept through KwaZulu-Natal and Gauteng in July.

However, the middle class is not as confident as the poor and the rich, which impacted on consumer confidence.

Resilient consumers and consumer confidence is good news for businesses, because it shows that consumers are ready to spend. After the FNB/BER Consumer Confidence Index slipped from -9 to -13 index points in the second quarter of 2021, it recovered some lost ground to -10 in the third quarter and surprisingly did not deteriorate further.

Although the latest CCI reading of -10 is still well below the average reading of +2 since 1994 and therefore still indicates depressed consumer confidence levels, it is quite close to the reading of -9 recorded just before the pandemic started in the first quarter of 2020.

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Improving financial positions

The increase is possibly due to improving household financial positions and time-to-buy durable goods sub-indices of the CCI when consumers are less pessimistic and feels it is an appropriate time to buy durable goods such as vehicles, furniture, household appliances and electronic goods as demonstrated by this index recovering by 7 points to the best reading since the first quarter of 2020, although it is still quite negative at -29 index points.

The household finances index improved by 2 index points to +12, which shows that most consumers anticipate an improvement in their household finances over the next year. However, the economic outlook sub-index of the CCI remained rather depressed at -14 index points.

The index gets really interesting when it is broken down per household income groups:

• high-income households that earn more than R20,000 per month had a significant increase in their confidence level from -18 to -11
• low-income households that earn less than R2,500 per month also rebounded strongly from -22 to -12
• middle-income households that earn between R2,500 and R20 000 per month, slipped further from -9 to -10 index points.

While the second quarter saw a sharp drop in confidence levels for low-income consumers to lower levels compared to that of the other two income groups, the confidence levels of all three income groups were at broadly similar levels during the third quarter.

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Reasons for resilient consumers

“The reinstatement of the R350 per month Social Relief of Distress (SRD) grant between August 2021 and March 2022 is a major relief to millions of low-income households,” Siphamandla Mkhwanazi, FNB economist says.

“Given soaring food and fuel prices and the fact that our unemployment rate climbed to a record high during the second quarter, the expiration of these grants at the end of April left gaping holes in the budgets of low-income households.”

Mkhwanazi says like the results for the low-income group, the upturn in consumer sentiment among high income consumers was also largely driven by an improvement in their household financial prospects.

“The public sector wage agreement that was reached at the end of July in all likelihood bolstered the confidence levels of the more than a million civil servants in South Africa, most of who fall in the high-income category.”

He says although government employees will only receive a 1.5% increase this year, the wage deal includes a non-pensionable cash allowance for civil servants of R1 220 to R1 695 per month until March 2022, backdated to 1 April 2021 that will boost their income significantly and lead to consumer confidence.

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Class differences and consumer confidence

“The recent uptick in dividend payments probably also boosted affluent consumers’ confidence and contributed to their increased willingness to buy durable goods during the third quarter. Middle-income consumers, on the other hand, were less optimistic about the outlook for their household finances during the third quarter.”

Middle-income earners do not qualify for the SRD grant, but some are government employees who will benefit from the cash allowances. “The alarming decline in formal sector employment during the second quarter probably hit middle-income households the hardest.”

He believes that the violent looting and arson that destroyed shopping malls, warehouses, factories and small businesses in KwaZulu-Natal and Gauteng exacerbated employment prospects for middle-income earners.

“Furthermore, middle-income consumers are also less likely to be able to work from home compared to high-income earners, implying that soaring petrol prices, up by nearly R3,50 per litre since January, would also have a disproportionally negative impact on this group.”

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Balancing act

Mkhwanazi says it seems that although the rioting and looting knocked business and consumer confidence, the subsequent announcements of substantial further fiscal support in the form of the reintroduction of the SRD grant and cash allowances for government employees countered the adverse impacts of the civil unrest on consumer confidence to a large extent.

The rollout of Covid-19 vaccinations to the remaining age groups likely also bolstered consumer confidence levels.

“The fact that consumer confidence and consumer resilience could recover so quickly after the extended level 4 lockdown and unprecedented social unrest points to a level of resilience among consumers. Consumer spending may well hold up better than initially anticipated during the second half of 2021,” Mkhwanazi says.

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Future outlook for consumer confidence

However, as total employment stays at nearly 1.5 million below pre-Covid levels, much of the impact of resilient consumers appear to be tied to government support, as well as special factors such as retrenchment packages and life insurance pay outs.

“We remain hopeful that job creation will start to recover next year once heavily hit industries, such as tourism, liquor stores, restaurants and hotels are able to reopen fully, it will sustain the consumer spending recovery.

“However, there is certainly downside risk to the outlook should the current sizeable levels of fiscal support and other special factors propping up household income start to fade,” Mkhwanazi says.