South Africans buying less but paying more, stay financially vulnerable

South Africans are becoming more financially vulnerable and although they are spending less, they are paying more due to rising interest rates, high food and fuel prices and rolling blackouts while their income remains static. Their never-ending financial vulnerability also affects their mental state and intensifies the deterioration of family life.

According to the Momentum-Unisa Consumer Financial Vulnerability Index (CFVI), which remained below 50 points in the second quarter, rising prices and load shedding remained the risk factors exerting the most pressure on consumer finances, followed by rising interest rates in the second quarter compared to the first quarter. Economic growth was the next biggest risk factor.

The outlook for an improvement in the economic environment to support consumer finances also remained bleak. The economy is expected to continue its poor performance, while consumer price inflation (CPI) is expected to be sticky at somewhat lower levels. Unemployment is also expected to remain at the current high levels and the state of consumer finances will probably remain at its vulnerable levels or even worsen.

The index increased slightly from 49.1 points in the first quarter to 49.3 points in the second quarter and has now been below the level of 50 points for 12 out of the last 15 quarters (since the third quarter of 2019), indicating a persistent state of financial vulnerability.

ALSO READ: Load shedding makes it even harder to save

Income deteriorated while spending improved

Significant changes in the index during the second quarter show that the income index deteriorated from 50.9 to 49.9 points, while expenditure improved from 48.3 to 52.3 points. However, the savings vulnerability index weakened from 48.9 to 47.3 points, while the debt servicing subcomponent also deteriorated from 48.4 to 47.7 points.

Due to high inflation and expected inflation, the South African Reserve Bank increased the repo rate by another 50 basis points in the second quarter after a 75 basis point increase in the first quarter.

High interest rates directly and indirectly impacted the four subcomponents of the index compared to the first quarter, with three deteriorating and one improving. Consumers in general changed their saving and spending patterns to make ends meet.

Consumers were less expenditure vulnerable because they continued to reign in their purchases to live more within their means, bringing them closer to balanced budgets. However, they were more income vulnerable as their prospects of earning additional income to finance the additional debt payments deteriorated.

As they have to channel more money towards debt servicing while becoming more income vulnerable, consumers sacrificed savings for emergencies and retirement which again negatively affects their savings vulnerability.

Rising interest rates contributed to consumers’ higher debt servicing vulnerability in the second quarter and they had to pay more to service their debts, which negatively affected their ability to service existing debt.

Consumers were in a persistent state of being financially vulnerable since the third quarter of 2019 as the index was below 50 points for 12 of the 15 quarters up to now. This prolonged state of financial vulnerability affected their mental state and behaviour.

ALSO READ: Consumers under pressure as private sector credit growth moderates

Mental effects of financial vulnerability

The strongest behavioural impact of consumers’ increased financial vulnerability was a reduction in consumers’ mental bandwidth which means that they were constantly planning to make ends meet that affected productivity and other important matters negatively.

Although their low mental bandwidth continued in the second quarter, the strongest effect of financial stress was a further deterioration in interpersonal relationships with family, friends and colleagues.

• 71.7% stated that consumers were uneasy, unhappy, despondent or negative when thinking about their finances
• 73.7% stated that consumers were constantly thinking about their finances
• 88.9% said consumers’ financial situation put strain on their interpersonal relationships.

The risk factors that affected consumer finances in the second quarter were high food and fuel prices, while load-shedding continued to be the risk factor exerting the highest pressure on consumer finances, although the order changed slightly. There was less load shedding compared to the first quarter, leaving the gap for high food prices to take over as the highest risk factor.

However, rising interest rates became one of the strongest high-risk factors after another increase of 50 basis points in the repo rate in May. While 76.3% of key informants deemed rising interest rates to be a high risk to consumer finances in the first quarter, this changed to 81.6% in the second quarter.

ALSO READ: Most South Africans unable to save anymore

Low economic growth also makes consumers financially vulnerable

More key informants also deemed low economic growth as a high-risk component in the second quarter as the struggling economy restricted the income-earning prospects of consumers. With price increases and the rising debt servicing burden negatively affecting the purchasing power of consumers, personal income taxes also made consumers more financially vulnerable.

The key informants do not expect an improvement in the state of consumer finances in the third quarter and about the expectations for the economic environment and consumer finances, the majority views for the third quarter were:

• 82.7% expect consumer finances to remain at the current vulnerable level or worsen
• 84.7% anticipate general prices to increase at the same rate or at a slightly slower pace
• Around 80% expect the global and domestic economic situation to remain the same or worsen
• 72.4% foresee an unchanged or worsening unemployment situation
• 84.7% expect that there will be a continued increase in prices
• 79.8% expect that the South African economic situation will remain the same or deteriorate
• 72.4% expect that the unemployment rate will remain the same or increase.

The index is aimed at providing information and strategies South Africans can use to accelerate their journey to financial success. The research was conducted by the Bureau of Market Research at Unisa on behalf of Momentum via an online and CATI-based survey conducted during July 2023 among 100 key informants from relevant industries, including banks, insurers, other credit industry institutions, retailers, municipalities and consumer researchers, that can gauge consumers’ financial perceptions and positions.