This is what proposed 2% VAT hike did to consumer confidence

The proposal from Minister of Finance Enoch Godongwana to balance the country’s budget by increasing VAT by 2% had a huge effect on consumer confidence.

The FNB/BER Consumer Confidence Index plunged from -6 to -20 index points during the first quarter of 2025. The index combines the results of three questions posed to South Africans about the expected performance of the economy, the expected financial position of households and the rating of the appropriateness of the present time to buy durable goods, such as furniture, appliances and electronic equipment.

Mamello Matikinca-Ngwenya, chief economist at FNB, says the prospect of significantly higher taxes via VAT hikes or further bracket creep on personal income tax, probably alarmed many consumers. “Although the March Budget, which took place after the fieldwork ended, softened the VAT hike, it still places a significant tax burden on consumers, which would have weighed on sentiment too.”

ALSO READ: Consumer confidence slips in fourth quarter, but still better than last year

Trump’s trade wars and fight with SA

The souring of diplomatic relations between South Africa and the US and the corrosive knock-on effects of the trade wars triggered by US President Donald Trump likely also contributed to the extraordinary deterioration, she says.

“The 14-point plunge in the index during the first quarter of 2025 is on par with the dramatic drop in consumer confidence when South Africa entered stage 6 load shedding for the first time in the first quarter of 2023.

“This time around there was also a brief return of stage 6 load shedding, which could have contributed to the downtick in sentiment. The first quarter reading of -20 is also the lowest index reading since the first half of 2023 and signals an alarming deterioration in the outlook for consumer spending after the strong end to 2024.”

All three sub-indices of the Consumer Confidence Index declined notably during the first quarter:

• The economic outlook plunged from -9 to -32 index points, reversing nearly all gains made from the improvement in electricity supply and the establishment of the government of national unity (GNU) in mid-2024;
• The household finances slumped from 11 to -1;
• The appropriateness of the present time to buy durable goods retreated from -21 to -28. 

ALSO READ: Consumer confidence at five-year high, but still below average

Consumer confidence plunged across all income groups

A breakdown of the Consumer Confidence Index per household income group shows that sentiment soured significantly across all income groups. The confidence levels of high-income households (earning more than R20 000 per month) tanked the most, with their confidence reading plummeting from -4 to -30.

The vast majority of high-income households now expect the country’s economic performance and their own household finances to deteriorate over the next 12 months, a complete turnabout from their expectations just three months ago.

The confidence levels of middle-income households (earning between R5 000 and R20 000 per month) decreased from -7 to -19 and for low-income households (earning less than R5 000 per month) from -7 index points to -17.

After a surge in retail sales during the festive season, the outlook for household expenditure has deteriorated notably, Matikinca-Ngwenya says. “The boost from two-pot retirement system fund withdrawals will be significantly less during 2025 compared to the roughly R40 billion paid out in 2024, while Trump-triggered trade wars and rising global uncertainty are reducing the likelihood of further interest rate cuts.

“The withdrawal of all US aid to SA and the rapid deterioration in diplomatic relations with the US would also have knocked consumer confidence, but the biggest blow to consumer sentiment likely emanated from National Treasury’s tax proposals and the discord among GNU partners.”

ALSO READ: GNU talks: Consumer confidence remains in limbo

Consumer confidence will still suffer with VAT hike

She notes that although the 2%-point VAT hike option has been shelved, the budget tabled on 12 March still calls for a 1% VAT hike over two years and no inflation adjustments to income tax brackets and medical aid tax credits for the second consecutive year.

“Above-inflation increases to social grants and the expansion of the zero-rated VAT basket should partially shield low-income households, but if implemented, these tax proposals will deal a significant blow to the financial positions of high-income households.”

Matikinca-Ngwenya points out that the consumer has been the growth engine of the South African economy over the past decade. While real consumer spending grew by 11.2% (cumulatively) between 2015 and 2024, real GDP excluding consumer spending showed no growth over this timeframe.

“Given the stark underperformance of the production and investment sides of the local economy, the collapse in consumer confidence and deterioration in the outlook for household consumption expenditure should set alarm bells ringing in terms of South Africa’s economic prospects.

“The combination of rising inflation, tight monetary policy and higher real taxes will erode households’ ability to spend, while plunging consumer confidence levels signal a dramatic decline in consumers’ willingness to spend. The fact that the confidence levels of high-income consumers – the group with the greatest spending power, by far – declined the most, only compounds the concern.”

ALSO READ: SA consumer confidence improves slightly in first quarter of 2024

Outlook for consumer spending will affect GDP

She says although the VAT hike has been changed, the outlook for consumer spending – and by extension GDP growth – has nevertheless deteriorated. “With consumers likely to be burdened by high real interest rates and rising taxes, structural economic reforms and other confidence boosting policies are required to spark new growth drivers for the South African economy.”

Jee-A van der Linde, senior economist at Oxford Economics Africa, also says the sharp decline in consumer confidence suggests a notable deterioration in the outlook for household expenditure. “Given that consumption has been one of the few areas where the South African economy has shown some semblance of a sustained recovery, this is concerning.

“With private sector investment still muted and without any prospects of increasing meaningfully this year, gloomy consumer sentiment presents growing downside risks to our baseline real GDP growth forecast of 1.5% in 2025.”